Business sustainability, duration and moats

Those enormously fat operating margins had better have some large and unassailable moat to hold out the inflow of competition. There are few examples of companies in the Australian context who have expanded their moats via market share gains and operating leverage. Domino’s Pizza is one, who recently lowered the price of its pizzas in a meaningful way. This drove share gains and much greater volumes through its system further strengthening their relative position versus key competitors who have responded via store closures. In a global context, businesses like Amazon.com, Costco and Aldi have all reinvested their operating leverage in reducing their prices or offering their customer more value via things like free or subsidised delivery. In contrast a number of companies in Australia have pulled the price lever at the expense of duration. Examples here we believe would include Realestate.com.au who seem to have stretched their pricing well beyond what is justifiable from their additional audience share over Domain.com.au and now run the risk of having to retrace pricing to hold their customers who are starting to defect to other sites. We would also highlight the risks at businesses like Ozforex, who although earning high returns on capital with high margins at present, are allowing competition to price under their umbrella. With competition rising and the cost of customer acquisition also increasing, it feels like only a matter of time before these forces start to crimp current business growth, margins and thus business duration. Read the full report here: (VIEW LINK)