In today’s increasingly digitalized world, investors need to be ultra-cautious about their investment theses. While technology undeniably benefits society and users in a big way, the introduction of new tech can all too often destroy a business or industry..
Just take a minute to think about how long-time incumbent Gillette’s brand equity that was quickly diluted by Internet upstart Dollar Shave Club. America’s iconic department stores have sufferred from e-commerce, while the funeral service industry’s pricing power was disrupted by comparison websites.
In this article, we will explore three categories to help find technology-proof consumer businesses that could be immune to threats from the ever-expanding digital space.
When a brand earns significant mindshare among its target consumers, the distribution of products has become much less of an economic moat. The brand would worry less in terms of competing for channels to reach consumers. Instead, consumers would find every way to buy the products, as they would see few alternatives.
In today’s fast-moving world, such cases are admittedly rare but do exist. Examples in our investable universe include the ultra-luxury brands like Hermes (XPAR:RMS) and the prestige beauty brands like Estee Lauder (NYSE:EL). It is unlikely that the wealthy will get tired of their status-conscious preference for century-old heritage brands any time soon.
Our second group involves consumer experiences that are difficult to replicate online. For instance, off-priciers TJX Companies (NYSE:TJX) and Ross Stores (NASDAQ:ROST) have every compelling reason for their customers to frequently visit their brick-and-mortar stores by offering a discovery-based “treasure hunt” experience that is almost impossible to imitate on the Internet. No wonder both companies keep earning high returns on capital while those more traditional department store businesses struggle.
In comparison, it is getting more and more common for large-scale retailers like IKEA and Pandora (OCSE:PNDORA) to make every attempt to enhance their offline shopping and omnichannel experiences to fend off competitions from digital disruptors. Of course, the outcome is a wait-and-see, in our view.
Uneconomical (online) business
Lastly, we think that some business models, if taken online, are far from being economical for now and the foreseeable future. Take a look at Tractor Supply (NASDAQ:TSCO), the only major retailer serving the rural life in the U.S. The company operates stores typically selling bulky items with a limited ticket size across locations that are far away from city centers and less dense in population. It would not be cost-effective for online platforms to compete for the market share here.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Hermes.
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About the author:
Steven CHEN is a quality-focused investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.
Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital).
Steven can be reached at [email protected] or through LinkedIn.