This is a continuation of my 10 part series on the core concepts I am focusing on in this difficult market environment. (Part I, II)
My third point is huge and I’m not exaggerating when I say that in this environment the one thing you DO NOT want to do is invest into a company that competes on price. A company should never compete on price. It’s one of my fundamental beliefs both as an investor and a student of strategic management. When you compete on price in order to increase market share, pressure your competition or spur demand good things don’t happen very often. Now Walmart (WMT) does a very good job competing on price because they have a sustainable competitive advantage in supply chain management. They can offer greater discounts to their customers, but don’t confuse that with lower margins. Walmart saves money on SCM and passes that along to consumers while sustaining their margins and they don’t compete on price on every item or service that they sell. Usually the lowest priced item is one that they heavily discount against competition, but higher end models of the same product likely cost more when compared to competitors.
Management may compete on price when all other options to increase demand have been exhausted, but likely it’s the final nail in the coffin. McDonald’s (MCD) learnt from this mistake years ago and today focused on the customer experience, quality & customer service rather than an absolute price point. There are many other alternatives to increase your end customer demand and margins should never be sacrificed. A company with strong brand power won’t need to compete on price because demand is stable, growing and preferred among their target market.
Bottom Line: When you see a company publicly stating they will drop prices in order to compete more effectively beware of the end result. Watch Apple (APPL) as it dropped prices in September to create increased demand among absent consumers for their products. I’ll stake a bet margins are down 15% YoY and the market continues to hammer this stock. Concentrate on stocks with strong brands who know how to protect their businesses.
Suggested Stocks I Own: Colgate-Palmolive (CL), Shoppers Drug Mart (SC), United Parcel Service (UPS) & Daimler AG (DAI)
I’m curious about your thoughts on Costco. Do they compete on price? Why are they successful?
I’ll use it as an example in a future post after completing this series MG.
But no, I don’t believe that Costco competes on price. Their margins are surprisingly stable and although they offer a price incentive to consumers they don’t jeapordize their margins in an effort to attract business.