A closer look at supply chain risks
The integrity of a supply chain (sustainable access to raw materials, relationships with suppliers/farmers, fair treatment of workers, etc.) is a big component of the moats that protect businesses such as specialty chemicals companies, for example Kerry Group. Understanding their procurement processes gives us confidence that they have sustainable access to raw materials, making them less prone to disruptions, and enhancing the quality and predictability of the operations. This is why making sure companies have a degree of ownership and visibility of the supply chain is a key competitive advantage.
A harmonious global marketplace
The fair treatment of all stakeholders is an important consideration. Companies should not be looking to make supernormal returns by the exploitation of the geographical location of their customer base. For instance, luxury goods companies had for a while taken advantage of moves in exchange rates and, under the pretext of operating in different regions, were charging emerging market consumers exorbitant premiums, thereby making supernormal profits in these regions. However, as consumers became more mobile and travelled more, they quickly realised that they were being exploited.
In a connected world, where travelling is easier and cheaper, this approach to dealing with customers is not sustainable. Companies that operated with non-harmonising practices, and therefore treated their customers unfairly, have subsequently been forced to bring prices down and have destroyed entire pockets of supernormal profits. This was a contributing factor to the woes of Italian luxury shoemaker Tod’s, which has seen its fortunes decline ever since the Chinese government cracked down on ‘gifting’ in 2013.
The relationship between a ‘brand’ and consumers is often a key element of competitive advantage (the ‘moat’ around a business). If a brand’s reputation is damaged in any way and the relationship between a company and its customers deteriorates it can have significant negative implications for a company’s prospects.
Likewise, regulation, can make or break entire industries. Whether it is about taxing gambling revenues and promoting responsible gaming, or cutting Co2 emissions, these have direct impacts on our investments, and they are, once again, direct considerations.
Coming back to Continental – Continental Group is one of the main beneficiaries of regulation on CO2 emissions, which has accelerated the electrification of cars. As a main supplier to original equipment manufacturers (OEMs), Continental has kept a finger on the pulse and as a result has actively invested in electric components and autonomous technology, including Advanced Driver Assistance Systems. We expect the company to derive a growing part of its revenues and profits from these return-enhancing activities and help Continental maintain its wide moat around the business.