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A Different Investment Approach: Look for Unique, Not the Best

Aug 30, 2016

In this issue:
» Pulses at the Heart of Food Inflation
» Land Prices Have Started Falling
» Update on markets
» ...and more!
00:00
Sarvajeet Bodas, Research analyst

Back in 2008-10, while doing an MBA in Pune, I learned about competition, not so much from my text books, but on the ground level. Back then, staying in the hostel, I had to search for good meal options. It was a tough task, to be honest. One needs to consider several things before selecting a good place for food - proximity to the college and hostel, menu, food quality, turnaround times, service, prices, etc.

Now, Pune, 'the Oxford of the East', has various colleges. This means plenty of students looking for a good meal. This opens up a good market for mess services, small restaurants, tiffin service business, and domestic home-cooked food. Let's call them food entrepreneurs.

The competition is intense among existing food entrepreneurs. There are no entry barriers. Anyone can start this business. Here, food entrepreneurs try to compete on volumes rather than value.

Michael Porter mentions creating value, not beating rivals, is the heart of competition. During my time in Pune, I observed one particular mess service (let's call it Tasty Food Mess) stood apart from the competition. How did they manage?

Instead of competing to be the best, Tasty Food Mess was competing to be unique. They have done this by offering a variety of menus including special dishes, flexible dining timings, quick service and turnaround, and reasonable prices.

Let's create a link here. Since Tasty Food Mess offers a varied menu, students come to this mess and even tell their friends to join this mess. This increases the volume. Since the volume is increasing, the mess can charge a reasonable price. Because of this, more students join. With this, the mess further enhances its menu and offers special dishes twice or thrice a week. This creates a sticky membership. This link becomes stronger and stronger as time goes by.

This concept is all about value. It is about the uniqueness of the value you create and how you create it. The real point of competition is not to beat your rivals. It's to earn profits.

Now, let's apply this analysis to companies that outperform the industry. How do they do it? Either a company has some unique offering for which it commands a premium price. Think of Apple or Royal Enfield. Or it's because it offers a product or service cheaper than its competitors. Think of Walmart in the USA and Dmart in India. They have set themselves apart by offering products at very low rates.

Some companies further distinguish themselves by targeting a different audience. Here, companies pursue distinctive ways of competing aimed at serving different sets of needs and customers. The focus is on creating superior value for the chosen customers, not on imitating and matching rivals. Consider NBFCs (non-banking finance companies) that have focused on specific target markets such as tier-II and tier-III cities. By doing this, NBFCs avoided direct competition with big banks.

Focusing on a niche segment is another way a company can differentiate its business. Shriram Transport Finance focused on providing funding for pre-owned trucks, an area ignored by other competitors, specifically by banks. With this focus, the company is not only the leader in truck finance, but also India's largest asset-based NBFC.

This was primarily how The India Letter team recommended two companies in the last two months. These companies with their unique approach managed to outperform the industry. Not to mention these companies are small compared to the players who dominate the industry.

We used the above framework and identified key differentiators that will help these companies outperform the industry in the coming years. Strong financials and the tailwinds of overall economic growth, urbanisation, increased government spending, and better monsoons are set to strengthen this Megatrend in the coming years. Click here for more details...

What is your approach to find an investment opportunity? Let us know your comments or share your views in the Equitymaster Club.



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------------------------------

03:10 Chart of the Day

In a discussion about food businesses, the topic of food prices can't be far behind. Rising food prices are the bane of the Indian economy. It's the main culprit in keeping consumer inflation high. And as we are all aware, the persistently high CPI prevents the RBI from cutting rates.

However, it is wrong to think of food inflation as a homogeneous. Food prices of various items do not rise and fall in step. Annual cycles as well as structural factors influence these movements. Invariably, we find that only a few food items cause big changes in the CPI.

Today's chart clearly bears this out. The culprit is a familiar one, this time around. The prices of pulses are up 28.4% YoY in July 2016. This spike along with the rise seen in the prices of sugar and vegetables, are the reason why the CPI is above the RBI's comfort zone.

Can Food Prices Be Contained?


Sure, the RBI can't control food prices. However, it can certainly prevent inflation from becoming generalized. That is something the RBI has achieved under Raghuram Rajan. His successor, Urjit Patel, has his task cut out we believe.

Also, we highly recommend you read Vivek Kaul's latest article, What's Common Between Egyptian Cotton and Indian Pulses.

03:50

Regular readers will be aware, that we are no fans of real estate. The sector is corrupt to the core. The professionalism of developers is questionable. Home buyers are regularly left in the lurch. Property prices are artificially held high because of the enormous amout of black money that flows into the sector.

But things have been changing. Somewhere between 2011-2013 real estate began losing its luster. The torrent of bad news surrounding the industry has finally had its effect on people. Property sales have all but dried up.

However, prices did not fall much. The justification was always the high cost of construction. More specifically, the high cost of land. Fortunately for the common man, this too is changing. As per an article in Livemint, land prices in Delhi/NCR and Mumbai have fallen 9.5% and 4.8% respectively, compared to last year.

The basic laws of economics have finally begun to assert themselves in real estate. With every landowner jumping on the bandwagon, it was inevitable that the increased supply would result in lower prices. This has now started to happen. Will this result in lower prices of apartments? Only time will tell. But the trend is certainly down.

04:25

After opening the day on a positive note, the Indian stock markets continued to trade above the dotted line. At the time of writing, the BSE-Sensex was trading up by about 253 points while the NSE Nifty was trading up by 82 points. Sectoral indices were trading on a positive note with auto, IT witnessing the maximum buying interest.

04:50 Today's Investing Mantra

"The difference between successful people and really successful people is that really successful people say no to almost everything." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Sarvajeet Bodas (Research Analyst).

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2 Responses to "A Different Investment Approach: Look for Unique, Not the Best"

R.Raghunathan

Aug 30, 2016

Well written. Easily understood.

Like 

R.Raghunathan

Aug 30, 2016

Excellent.

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Equitymaster requests your view! Post a comment on "A Different Investment Approach: Look for Unique, Not the Best". Click here!
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