The Commodity Trap is drawing ever closer
Pfäffikon SZ, Switzerland – The Russian bear and the Chinese dragon have been dominating the headlines recently. Readers who have been following me for five years already know that we let our stocks in the CIS region do their thing, and we don’t pay attention to the news of the day. In general, it’s ‘business as usual’ and in Russia there are plenty of opportunities in the pipeline, literally. It’s a shame that growth in Russia has temporarily stalled, but it’s not a disaster. The US and EU sanctions against Russia are largely cosmetic. The EU can’t afford to allow itself too much. Furthermore, Russian imports from the US don’t amount to much. I mention the above because investors regularly ask for my opinion about the subject, but Russia is already receiving plenty of attention. That’s why I would rather discuss the encroaching commodity trap.
Moat
Buying shares today is simple and cheap. However, when we examine a company as a potential long-term investment, the company must meet our thirteen investment criteria. An important criterion is a company’s competitiveness and to what extent any competitive advantage can be maintained. Whenever you look at a company in this way, most don’t make the cut. Warren Buffett, the successful investor, calls this the moat. With the exception of a few no-brainers, companies with a strong moat that can be purchased at a reasonable price are hard to find.
Prices under pressure
Prices of indistinctive products have been under pressure for a long time. This is sometimes called the commodity trap. A commodity trap occurs when a company’s competitive edge is lost and they can no longer charge premium prices for their products within the market they operate in. ‘Commoditization’ is often the result of a late response to changes affecting the company’s competitive position in a market. The customer is no longer able to distinguish the company’s products from those of its competitors and, as such, chooses the cheapest option. We are also seeing this development in my old profession, the world of brokers. IMG Holland, under the inspiring leadership of André van Eerden, was the first online broker in the Netherlands. After some noise at IMG Holland, Mr Bagijn and Mr Schaap founded BinckBank, which is now one of the best-known brokers in the country.
After many successful years, BinckBank is now a company struggling with the commodity trap in the brokerage field. BinckBank will need to provide more distinguished products because, after all, only one can be cheapest. There are enough hijackers at the Dutch Beursplein 5 who understand this point very well indeed. The case of BinckBank is not an isolated one. A recent study by Roland Berger Strategy Consultants and the International Controller Association (ICV) shows that 63 percent of the surveyed companies are already facing ‘commoditization’ of their products and services. “Companies that focus on price competition instead of investing in innovation, added value and adjusting their business models will inevitably face steadily falling prices for substitutable products or services,” said Michael Zollenkop from Roland Berger.
Avoiding the pitfalls
Behind the scenes at the Dutch Beursplein 5, I can see several initiatives that are designed to bring the commodity trap to a halt. Distinctiveness is one of the key words. Innovation or a strategy that is difficult to copy can command premium prices. In the financial world, there are too many products that may seem cheap but, in my eyes, are actually very expensive. After all, why would you pay to track an index or a simple, structured ETF? In terms of the ETF, experts think the first scandal is just round the corner (I’ll touch on this at a later time). One thing is certain: the uproar the commodity trap will cause over the next decade won’t be limited to just the financial world.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
