Either you’re good or you’re dead
More than anything else, one thing has been at the top of our mind lately: in business, if you’re not the cheapest or the best, you’re toast.
This really hit home to me when I travelled to the US in May 2018 to hunt for companies to invest in. I visited numerous companies that were investing heavily in their bid to stay one step ahead of Amazon (which we own). Or if not Amazon, then the disruption it overwhelmingly represents. Back in the 1980s, chief executives would spook each other with stories of corporate raiders that would swing aboard their comfy conglomerates, cut them up and sell off everything – even the corporate jet. Nowadays chief executives are stuck in more of a Terminator kind of nightmare: technology has turned on them. Amazon has been merciless in its advance on many industries, finding ways to cut costs and improve customer satisfaction. It’s not just Amazon though; Alphabet, another company we own, has decimated traditional media, while companies like Netflix and Hulu offer much cheaper TV than cable providers and ride-hailing/sharing apps are hurting taxis and rental firms.
Many old businesses took way too long to adapt to the new world and are now being punished for it. We invest in several companies that are doing the punishing, but we also own businesses that appear able to see off flash new rivals. As I said before, this tends to boil down to being indispensable to customers, the cheapest in the business or both. Typically, we find the best companies aren’t aiming to be a bargain basement, but instead offer a premium product. Like chemicals company Ecolab (which we own): it sells cleaning agent for substantially more than rivals, but its efficiency helps customers save money overall compared with lesser brands. Or US Bancorp, another of our holdings. It’s a mid-tier lender that realised most people – Millennials included – want to come to talk to a human when it comes to massive decisions like mortgages and life assurance. It found that it should invest in its branches and aim to provide a suite of services for these people. There are myriad other examples of companies figuring out what makes themselves useful, but you get the idea. There are risks to our approach though. For instance, banks are notoriously opaque – more than a few have revealed nasty surprises in their cultures or their books over recent years. And Ecolab has to keep at the cutting edge of its industry to stay ahead of competitors, that takes a decent slug of money each year which could in the end turn out to be futile. Also, the companies we prefer tend to be pricier than your typical, which means disappointments could be more heavily punished. We pay up for them because we think they have businesses that can survive in the new world.
Of course, having a good product or service is only part of a successful business. You have to be able to convince customers of it too.
David Coombs
Rathbones Multi-Asset Portfolio Funds Manager