Sean Stannard-Stockton Interview: Shifting Competitive Landscapes

14 November 2017 | by Paul Perrino, CFA

Ensemble Capital’s CIO Sean Stannard-Stockton was interviewed in the investment journal The Manual of Ideas. We’ve excerpted a discussion about changing competitive characteristics below and you can read the full interview here.

MOI: You’ve previously shared with MOI Global: “We only invest in companies that we think benefit from sustainable competitive advantages that we are in a position to understand.” Are there industries in which you previously felt comfortable investing which are evolving into a “too hard” pile?

Stannard-Stockton: Certainly, all industries go through cycles, and they also go through secular changes and I think one’s view on industries needs to be continually updated. That updating shouldn’t be too rapid. Nate Silver talks about Bayesian analysis, the way in which you should update your forecast based on new information, and Bayesian forecasting suggests that each new incremental piece of information or evidence shouldn’t generally radically change what your prior views were, but that doesn’t mean new evidence should have no influence at all.

Our view on all industries and businesses changes over time. One change it’s undergoing right now that I think is important, especially to a moat-based investor, is the change in the value of brands. Strong brand names have always been seen as a very strong competitive advantage, and they’re at the heart of many of the post-Munger, Buffett-style investments like Coca-Cola. Certainly, brands continue to have power, but we think it’s important to recognize that there are two main categories of brands. One type of brand lowers the consumer’s search costs. These are brands that help consumers make sure that what they’re purchasing is of good quality and of good value when they’re confronted with a wide array of potential purchase options.

Another category of brands are “prestige brands.” They’re brands that communicates to the purchaser, as well as to the purchaser’s circle of peers, something about who that person is. We think that the latter, the prestige brands – such as Ferrari, or Tiffany, and Apple with their smartphone brand – are all brands that continue to have enormous value, and that value is not under any threat whatsoever from the emergence of online shopping, marketplaces like Amazon or social media, or changes in consumer preferences among millennials. “Prestige brands” are very resistant to any sort of technological or cultural changes going on, but “search cost brands” – which are found frequently in the consumer staple sector which has been actually the best performing sector in the stock market for the past 50 years and is the source of many of the ideas that have driven many great investors over time – we think these sorts of brands are under assault because the ability for consumers to find information to lower those search costs have gotten much easier over time.

Today, if you log-on to Amazon and type in what you’re looking for – not a brand name, but a type of product – the #1 ranked item, regardless of brand, is likely to have thousands of reviews. If those reviews are say 4 or 4 ½ stars or better – with reviews from thousands of people, most consumers will happily purchase the item, no matter what the brand is. In this case, Amazon has effectively not just become a logistics provider, not just made shipping easy, not just benefitted from network effects, but it has inserted its own brand into the purchasing behavior – and so the consumer says, ”I trust Amazon and Amazon’s reviews so much that I don’t need to spend time searching or depending on a brand name, I can simply purchase the product no matter what its brand is.”

At the same time, social media has allowed people to discover all sorts of brands that may not have much marketing power. If you look at a brand like Coca-Cola, it has thrown around tremendous spending on marketing and it’s built up this enormously valuable brand. Alternatively, you can look at a beverage like LaCroix Sparkling Water. It’s been around for a long time, but as LaCroix caught on along the West and East Coast with people who use social media, the no-calorie, unsweetened product – which is exactly what a lot of people were looking for and what the traditional soda companies, Pepsi and Coke, have been striving to produce; a hit in a no-calorie, non-artificially sweetened category – LaCroix was able to take off and grow tremendously, with enormous market capitalization added to the business. And so, those sorts of brands where their primary value is helping the consumer quickly make decisions about value and quality, we think are under assault from changes in technology, which we think investors need to really be aware of. We’ve always very highly weighted brands in our analysis, but if you look at our portfolio today, it’s populated by much more of the prestige brands, many of which we think are currently being thrown out with general retail brands, when in fact it’s only the search cost brands that are under assault.

Read the rest of the interview here.

Clients, employees and/or principals of Ensemble Capital own shares of Apple (AAPL), Ferrari (RACE) and Tiffany (TIF).

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