I like to get creative when I study companies. Whether it’s getting inside management’s head as it relates to allocation of capital, or simply reading the footnotes to the financial statements, I often connect data points that can point out interesting conclusions.
One thing in particular that I am looking for is any indication of a competitive advantage that goes beyond your everyday cost cutting, corporate synergies, or oft-touted metrics by management. This is in part due to Warren Buffett’s quote:
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
As this relates to Campbell Soup Company, one we are all familiar with, I have an idea to put forward.
If you ask most people, they will tell you Campbell’s has a recognizable brand and as a result achieves superior economics. This is partially true, but in my studies of Porter’s Five Forces Model (new entrants, substitutes, suppliers, buyers, competition), every major theorist is unanimous in believing that new entrants are by far the biggest threat. So if a firm has high barriers to entry, it is near-impossible to take them down. And while Campbell’s brand is a barrier to entry, I don’t think it’s the main one that’s keeping them in business.
Their main advantage is simple: what they sell is heavy. Really heavy, in fact, for how much you pay for it.
Because Campbell’s sells a lot 0f their product for very little, and because it weighs a lot, they’ve invested heavily in their own regional manufacturing and distribution facilities. In the U.S. alone, they have 13 states with manufacturing capabilities. This investment of $2.3 billion is a major hurdle for any company entering the soup business.
If I were to come up with a list in my mind of the heaviest items per dollar spent, this is what I’d come up with (dollars per pound, roughly as prices aren’t readily available online):
- Coca-Cola (on a 12-pack basis): $0.62
- Budweiser (on a 20-pack basis): $1.42
- Campbell’s Soup (on a 1 can basis): $1.62
- Bricks: $0.07
- Cinder blocks: $0.06
- Aggregate: $0.005
These are the prices per POUND. Less than $1 is pretty significant, even less than $2 is still a ridiculous amount of product to move.
What I have identified here are a list of businesses that require sophisticated, low-cost, large-scale distribution to earn a reasonable return on their capital. And this is so expensive and low-return that Coca-Cola even separates this out into a separate public company. But as far as advantages go, not only would you have to compete with Coke or Campbell’s or Budweiser’s brands, you’d also have to come up with something to the tune of $21 billion for Budweiser. And this is just so that you can sell each item for $1-3 a piece. Not an easy task, indeed.
I also included some building materials businesses because I think they are relevant as well. I have seen some very talented value investors checking out aggregate and brick companies and I never stopped to think why. But selling 1 ton (2,000 pounds) of aggregate for $10-11 means nearly all the value captured is through economies of scale for shipping. It provides a regional competitive advantage and virtually guarantees nobody else can compete. I do remember reading a few years ago that the aggregate companies were consolidating; a quick check showed me just two large ones remain: Vulcan Materials and Martin Marietta. I’m going to start looking for more of these both domestically and internationally to see the economics, as well as the advantages they possess.
You’ll have to forgive me if I took this from a book, I cannot remember if I figured this out or I read it somewhere. Either way, I think it’s highly useful for starting to conceptualize hidden competitive advantages.