Investing in an Age of Disruption
At a recent conference, Jorge Paulo Lemann, co-founder of Brazilian investment firm 3G Capital, told the audience that he’s “a terrified dinosaur” in the midst of the disruption occurring in the consumer goods space. Since 2004, 3G has made notable investments in global consumer brands, including Heinz, Burger King, Kraft Foods, and Tim Hortons.
“We bought brands that we thought could last forever,” he added, “now we have to totally adjust to new demands from clients which are a lot more fickle.” As Sean has argued in these two posts, many consumer staple moats are being disrupted by upstart brands enabled by lower barriers to entry in advertising and distribution.
Whether it’s mobile commerce, robotics, genomics, energy, artificial intelligence, or autonomous electric vehicles (AEV), the amount of potentially disruptive technology can be intimidating.
As moat-focused investors, we’re looking for companies that can earn or retain a durable competitive advantage over the next decade and beyond. A dose of disruption makes this a more challenging – yet potentially more lucrative – task.
We believe there are four ways to approach disruptive technologies from an investment standpoint.
- Invest in the disruptors themselves. This approach has the widest distribution of outcomes and payoffs are typically feast or famine. All else equal, we prefer companies with more predictable cash flows, which rules out many companies in this category. That said, we think we will participate in the growth potential of AEVs via our investment in Alphabet, which owns self-driving technology company, Waymo.
- Invest in the beneficiaries of the new technology. We like companies that are culturally agile and embrace and integrate helpful innovations. Consider how Starbucks developed the leading U.S. mobile payments app, Schwab built robo-advisor capabilities, or Broadridge Financial invested in blockchain. Smart adoption of new technology can both defend and widen a firm’s economic moat.
- Avoid the disrupted. While some companies are receptive to innovations, others are culturally resistant to change. These are not the companies you want to own during periods of disruption. In the past few years, for example, we’ve intentionally avoided blue-chip consumer staples stocks because we believe many of their moats are narrowing.
- Look for opportunities from overreactions. Potentially disruptive technologies make for good stories and headlines. In the last five years, U.S. financial media has frequently written about the threat China’s Alipay mobile wallet poses to Visa and Mastercard. While we greatly admire the Alipay ecosystem, the network effects enjoyed by Visa and Mastercard are proving hard to overcome.
We live in an extraordinary era of innovation and it’s a great time to be a moat-focused investor. Over the next decade, some moats will be built, some destroyed, and others strengthened. If we’re to be successful, it’s important for us to consider both the potential impacts of new technology as well as its limitations.
As of the date of this blog post, clients invested in Ensemble Capital Management’s core equity strategy own shares of Starbucks (SBUX), Schwab (SCHW), Broadridge Financial (BR), and Mastercard (MA). These companies represent only a percentage of the full strategy. As a result of client-specific circumstances, individual clients may hold positions that are not part of Ensemble Capital’s core equity strategy. Ensemble is a fully discretionary advisor and may exit a portfolio position at any time without notice, in its own discretion.
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