Click to read the original article for details. Source: Jingcai Capital (ID: jcziben), Author: Mr. K

The concept of economic moats was proposed by legendary investor Warren Buffett, referring to a company's sustainable competitive advantage in defending against competitors' attacks. It mainly includes four dimensions: intangible assets, network effects, user switching costs, and cost advantages.

Mr. K finds a classic saying: If your competitors know your secret but still cannot imitate you, then you have a structural competitive advantage—that is a 'moat.'

So, what are the common moats in the FMCG industry? And what characteristics do they have?

Jingcai Capital, based on its service experience and research in the consumer sector, summarizes some points and attempts to discuss key issues. We hope this is helpful, and we welcome your feedback.

Brand

Unlike industrial products, consumer goods companies directly face the end consumers, so the role of brand is crucial.

The significance of brand lies, on one hand, in being a "repeatedly verified quality promise," allowing consumers to buy "without thinking," essentially improving the efficiency of people's lives. On the other hand, in the new era of consumer sovereignty, brand also has an important function—providing users with a sense of "image and identity recognition," that is, "value output."

Therefore, in consumer goods companies, brand marketing has always been a core task. All consumer startups strive to occupy consumers' minds, making consumers think of them first when they need the product.

Of course, changing consumer minds is very difficult. For example, despite China's technological development and high-speed rail going global, in the automotive market, especially the high-end car market, foreign brands still dominate. This is precisely due to deeply entrenched mindshare. This indirectly reflects that brand is a huge moat for consumer goods companies.

However, we also observe that the role of brand indeed varies across different consumer segments and market groups. Generally, in markets with greater product differentiation or stronger personalized user needs, the role of brand is smaller, while in more standardized markets, the role of brand is greater, such as the air conditioning market. In markets with higher information asymmetry, the role of brand is greater, such as medical services. Additionally, in consumer goods companies, the moat of high-end brands is much wider than that of low-end brands in the same category.

Mr. K believes that consumer startups must have a clear positioning. If you truly position as a high-end brand, don't try to take all the meat. China's market is huge enough; doing your own part well is sufficient. For example, Wuliangye once had too many sub-brands covering high, medium, and low price points, which weakened its brand power in consumers' minds, allowing Moutai, which only focused on high-end, to surpass it.

In fact, if you choose to focus on the so-called mass market and improve operational efficiency and turnover, you can still make money, possibly even more than high-end-only brands.

For instance, Japan's richest person is the boss of Uniqlo, Spain's richest person (once the world's richest) is the boss of ZARA, and Germany's richest person is the boss of the discount supermarket ALDI. Ma Yun's companies are almost all named "Ant XX," "Cainiao XX," "Ping Tou Ge XX"... Despite doing such big business, they still insist on targeting the grassroots route.

Furthermore, we find that when a new category emerges, society gives it high attention and discussion value, and there are fewer competitors, so brand communication costs are low, often self-propagating—this is the so-called industry dividend period. For example, the rise of Heytea and Naixue caught the dividend of the new-style tea drink boom, gaining much attention and discussion.

At the same time, when a new category first appears, consumers have a high tolerance for product defects because everyone is imperfect. But when the category matures, the opposite is true; new brands may even have to pay ten times the cost to get the same attention. Therefore, in the current fresh-made tea market, it is very difficult for new brands to emerge.

Additionally, when users consume, they think and purchase by category, not just brand. Thus, in practice, the best brands often create new categories innovatively, and can even use the brand name to directly represent a category, such as the relationship between herbal tea and Wanglaoji/JDB.

Product

Although the foundation of a consumer company is to make a good product, generally speaking, we believe that product technology itself is difficult to constitute a company's barrier. Even in the real business world, sustained product leadership is the dream of all companies, but it is extremely difficult to maintain and unpredictable.

When Mr. K was a student, the media constantly instilled the concept that Coca-Cola's most mysterious and valuable asset was its formula. But now, thinking back, Coca-Cola's success relies on its strong brand, mature sales network, and costs spread over massive sales volume. Even if the so-called secret formula locked in a safe were given to an ordinary startup, so what? Is the cola formula really that hard to crack?

In today's developed industrial system, many categories are technologically mature, and product performance iterations are shrinking. At the same time, supply chains for these categories are highly developed, and in many cases, factories have product R&D capabilities. Emerging brands and retail companies can leverage these mature supply chains to provide quality products, and the advantage of brands in product R&D is becoming weaker.

Moreover, the internet era has broken down barriers to design and prototyping, making communication and supply chains global and convenient, reducing the time needed for brands to bring products to market.

A common problem for many consumer startups today is that after finally developing a better new product, leading companies quickly follow up, produce the same product, and fill national channels at cheaper prices, coupled with simultaneous advertising in major media. Then who would know about another startup's product?

Channel

In daily life, one important factor influencing consumers' purchase of consumer goods is convenience, which for companies is the channel. When consumers need a product, being the first to come to mind is the brand's pull effect; making it easy for consumers to find you is the channel's push effect.

I once saw a classic saying online: The Great Wall has no technical content, but the technical barrier of the Great Wall is very high, simply because it is long.

Indeed, generally speaking, sales channels may not seem like a "moat," but when the cost for competitors to replicate the same channel reaches a certain level, the channel becomes a "moat."

Take the restaurant chain industry as an example. The cost of channel expansion in the direct-operated model is astonishingly high. Even franchise chains, which expand channels in a so-called light model, have considerable channel costs. Franchise recruitment not only requires a lot of time and personnel, but the harder part is how to maintain retention rates amid rising traffic costs.

For example, Jingcai Capital's client "Auntie Shanghai" has over 1,200 stores across the country. The sheer number of stores may not constitute core competitiveness; fast-franchise companies may have more stores. But if the store survival rate reaches about 92%, it constitutes a strong core competitiveness in a sense.

Furthermore, in the vast third-, fourth-, and fifth-tier cities, especially county towns, prime locations are very limited, so first-mover advantage in channels is crucial. We can see that many leading consumer goods companies on the A-share market win through channels, such as Juewei Duck Neck, Haitian, and Gree Electric.

A consumer investor once said that the "channel-driven model" is a business model with Chinese characteristics, not belonging to Buffett's "moat" theory, and that "channel-driven" is more suitable for third-, fourth-, and fifth-tier cities. Products are easily looked down upon by ordinary retail investors, and such companies may be undervalued by the market for years. Mr. K deeply agrees with this.

Therefore, for fast-moving consumer goods and products with weak brand attributes, the role of channel is even as important as brand. Consumer goods companies face hundreds of millions of users nationwide or even worldwide. How to spread products across the world and let consumers contact you the most is a very important competitiveness. In fact, we can see that many domestic brands find it difficult to go overseas under their own brands, but it goes smoothly once they switch to OEM. One of the fundamental reasons is that developing distributors and channels abroad is very difficult.

Of course, the rapid development of the internet in recent years has changed the original distribution channels in the business world, prompting entrepreneurs and investors to rethink some rules of consumer entrepreneurship. For example, Three Squirrels, which just went public a few days ago, grew rapidly largely because it seized the dividend of channel changes.

Summary

In conclusion, brand and channel constitute the most core daily barriers for most consumer goods companies, and the accumulation of these elements takes time.

Therefore, many consumer goods companies may have slow revenue growth in the first few years, but once they reach a tipping point, revenue will rise rapidly. For example, Red Bull entered the Chinese market on December 25, 1995, took 8 years to achieve sales from 0 to 1 billion yuan, another 8 years to achieve 1 billion to 10 billion yuan, and only 2 years to achieve 10 billion to 20 billion yuan.

Of course, the real business environment is complex and changeable. The market space of the chosen track and the competitive landscape also greatly affect the judgment of so-called barriers. Moreover, entrepreneurs' learning ability, adaptability, and execution ability will constitute more real barriers for the company.

It is also worth noting that in investment and financing project practice, the so-called moat (core competitiveness) cannot be judged solely by what the company says; it should also be seen from key financial data.

For example, companies with brand effects usually have higher pricing power and lower sales expenses. When a company's revenue growth begins to exceed cost growth, it is the time when economies of scale start to show. If a company's financial indicators deviate greatly from its described business model, it deserves high attention.

Jingcai Capital also welcomes more entrepreneurs and investment institutions in the consumer sector to connect and communicate with us.

Source: Jingcai Capital (ID: jcziben), a research-driven consulting boutique investment bank, focusing on capital empowerment for outstanding entrepreneurs in the consumer sector. Welcome to follow.