Warren Buffett (of Berkshire Hathaway (NYSE: BRK.A) fame of course) is able to tell us why companies like Beyond Meat (NASDAQ: BYND) and Oatly (NASDAQ: OTLY) have been such successful destroyers of shareholder capital – they ain’t got no moat. That is, of course, something that in itself needs explaining.
Buffett’s point is that it’s all very well having a nice idea. Even, one making something that lots of people want to buy. But there’s this thing called competition out there which acts like a mafia on your earnings. “Nice company you’ve got here, be a shame if there was some competition” sorta thing. Because competition increases supply, depresses prices and there go the profit margins.
So, Buffett likes businesses which have a moat around that profit margin. Something that stops others invading that same space. For the entirely logical reason that this means that if the market wants more supply then someone else can’t come in and supply it. Or even, no one can see the fat profits being made and set up to compete with them.
So, what has gone wrong with Beyond Meat and Oatly – to take just two examples from the plant-based meat and milk space? These plant-based alternatives are taking the consumer market by storm. Or at least they have been and maybe they will continue to do so. But as far as investments by outside shareholders are concerned, they’ve been disasters. BYND is down from all time highs of $235 (OK, agreed, that a very speculative high) to $14.13 at the time of writing. Oatly’s ADR was once at $25 minus change and is now at $1.38. OK, shorting these would have been fun but that’s not quite the point here.
Why wasn’t an innovator in an expanding market rewarded with expanding profits and a higher share price? Because there is somewhere between nothing and very little to stop other people making much the same thing and competing in the same space. There’s no moat.
For example, Tyson Foods (NYSE: TSN) is a giant in the food business, best known for chicken (well, that, and Clinton connections). This isn’t quite true, but nearly so, Tyson can invest Beyond Meat’s entire market capitalisation and not really notice the strain all that much. Further, the problems of turning pea protein (or soya) into something that looks like a burger aren’t all that great. Or rather, while it might have been difficult three decades back, we’re in what Terry Pratchett called “steam engine time”. Tech in general has advanced to the point that many people can do this and do it well enough. Again, there’s no moat.
The same is true of Oatly. Back when turning oats into something that could be mistaken, in a bad light (or with burnt tastebuds), for milk was difficult. Now it’s possible to anyone who can stump up for a packaging plant. Well, pretty much.
This is not just that old story of it being the pioneers who can be identified by the arrows in their backs. The point is that if you’ve got a good – grand even great – idea then how do you stop others just copying you? And the point of all of this is that if you can’t then you’re not going to have lasting success.
Now this could all be thought of as a bit too ethereal as actual trading advice but there is a nub of importance here. Getting BYND’s soar and fall right would have made us lots and lots of lubberly cash. Getting the next rise and fall right will do exactly the same. But we need some method of identifying the rise and the fall. Or even, if there will be a fall. Lots of people have thought that Google (NASDAQ: GOOG) was going to face significant competition and the thing is they did have a moat – network effects.
So, when we see that next Big Thing and that speculation as to how far the stock is going to go. Sure, ride the bubble but what we really want to know is, well, is it a bubble or is this a soar that will plateau into a permanently high price? The answer there is the moat.
It’s really important to get this right. Back to foodstuffs for example. OK, the youth of today is interested in different things than us ancients. Avocado toast for example. Mission Produce (NASDAQ: AVO) supplies that market. But there are moats there, farmers have to be convinced to grow avocados, takes a few years for seedlings to produce fruit, the supply chain and logistics have to be worked out and so on. It might not be that deep or wide a moat, but it is there.
When we look at the plant-based food market those soaring stars have failed for the lack of a moat, OK, so when we look at the next Big Thing that should be our first question – where’s the moat? If there isn’t one, then this is a rise and fall to be played. If there is, well, maybe let’s not plan on the fall, eh?