No. of Recommendations: 5
Regarding retailer stocks. The Financial Times did an article about a week ago, looking at the interesting puzzle of UK retailers.
https://www.ft.com/content/ba9a9e6f-c243-4d61-88fe..."Why investors have largely shelved retail shares - Shoppers have profited, but very few shareholders have"
It's paywalled, but if you have a local library, university access etc you can access it, perhaps sign-up for a free trial. (The FT is also worth paying for, it's probably the best English-language daily newspaper around - the finance coverage is just a bonus.)
Anyway, the thing is - long term, too much competition and poor margins have ruined profits for most UK retailers. This may not translate to US retailers, but if you're considering a big investment in US retailers then perhaps the article is worth a look, or the idea is worth a think.
Thinking of that FT article, also reminds me of an interesting comment by Charlie Munger:
"Over the years, we've tried to figure out why the competition in some markets gets sort of rational from the investor's point of view so that the shareholders do well, and in other markets, there's destructive competition that destroys shareholder wealth."
"If it's a pure commodity like airline seats, you can understand why no one makes any money. As we sit here, just think of what airlines have given to the world ' safe travel, greater experience, time with your loved ones, you name it. Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk, is now a negative figure ' a substantial negative figure. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business."
"Yet, in other fields'like cereals, for example ' almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good, you might make 40%. But why are cereals so profitable ' despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it."
"Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That must be the main factor that accounts for it."
"And maybe the cereal makers by and large have learned to be less crazy about fighting for market share ' because if you get even one person who's hell-bent on gaining market share'. For example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I'd ruin Kellogg in the process. But I think I could do it."
"In some businesses, the participants behave like a demented Kellogg. In other businesses, they don't. Unfortunately, I do not have a perfect model for predicting how that's going to happen."
So I suppose my question is, is Costco like a cereal business, or an aeroplane business, and will it remain that way across all the most likely economic futures?
