At the core of Marcellus’ investment philosophy is the hunt for quasi-monopolies i.e, companies that dominate their sectors, especially where the product or service is essential to the common man. Such dominance often comes with superior RoCE’s (Return on Capital Employed) which in turn allows high reinvestment rates and therefore long term sustainable profit growth. This piece in the Guardian takes a similar look at the American consumption basket and points to the trend of a handful of companies dominating product categories. This might seem to suggest that the consumer is bereft of choice and hence capitalism has failed in its duty to drive competition and offer the consumer the freedom to choose. The article however argues that such dominance may not necessarily be a failure of capitalism but indeed the result of capitalism where companies that deliver value to the consumer through innovation and efficiencies and offer better products at lower prices end up taking the lion’s share of the consumer wallet. Marcellus’ portfolio companies too exhibit similar traits where despite high market shares, they are averse to taking price hikes but instead strive to drive profitability through operating efficiencies.
“American culture valorizes the small. Small-town life is overrepresented and romanticized on the screen – think Hawkins in Stranger Things – a form of escapism in a country where 80% of people live in a city, but two in five say they’d prefer a rural or small-town home. Likewise companies: US adults are three times as likely to have a “very favorable” view of small businesses as they are of large enterprises (59% v 17%), according to a 2018 survey from the Public Affairs Council. The nostalgia for small-town life and “mom and pop” stores stands in stark contrast not only to an urbanized population but the power of large companies. Capitalism is an engine of choice-making and competition, but very often the competition is between brands owned by the same company, or between small numbers of large economic players. Smallness rules the imagination; bigness rules the high street.
From the moment we wake up to eat our cereal and brush our teeth, our consumer choices are dominated by a handful of large companies.
7.30am: You brush every morning, right? Good. And there are so very many pastes to choose from. But most of these are produced by one of the three companies that dominate the market: Crest (20%), Colgate (21%) and Sensodyne (12%).
8am: A meal created by modernity, cereal has become a staple of western diets (unfortunately, but that’s another story). And it does not come artisan crafted from down the road, but from huge companies: Kellogg and General Mills have virtually carved the market up between them, accounting for almost a third of sales each.
8.30am: Most Americans drive to work, and most do so in a car manufactured by one of four companies: General Motors, Ford, Toyota or Fiat Chrysler. Together these four account for 60% of car sales. That said, the next five companies account for 30%: Honda, Nissan, Subaru, Hyundai and Kia. Here at least there seems to be some pretty robust competition, not least from overseas. But let’s see if that lasts…….
6pm: Calling a friend for after-work plans? That will be with an iPhone, most likely (55% market share): or perhaps a Samsung (25%). Either way, the chances are it will be using either Verizon or AT&T, who between them control two-thirds of the wireless market.
Big companies dominate consumption. This is not a bad thing in itself. Companies get big by winning customers, and they win customers by providing a good product and/or service, which is the whole point of consumer markets. Different divisions of large companies may compete against each other; consumers are often unaware that they are choosing between two products owned by the same company. The problem comes if success leads to incumbency, with large, powerful companies able to use their power to shape regulations to suit them, rather than assist their competitors. Being market-friendly is not the same thing as being business-friendly, a confusion common to politicians. Big is neither beautiful nor bad, so long as regulators remain faithful to consumers, rather than the companies serving them.”
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
Copyright © 2022 Marcellus Investment Managers Pvt Ltd, All rights reserved.