It was only after traveling across the heartland of America that I recognized the true value of a durable competitive advantage. On my way to the Berkshire Hathaway (NYSE:BRK.A) Annual Meeting, it was hard not to see a Coca-Cola (NYSE:KO) distribution truck every time you scanned the road’s horizon. After witnessing this firsthand, I wanted to immediately buy the stock as KO obviously benefitted from supreme economies of scale. Most investors flock to what seems to be the next high growth company, such as Amazon (NASDAQ: AMZN) or Apple (NASDAQ: APPL). However, these companies operate in a highly competitive industry where market share can be easily gained or lost. Coke’s biggest competitor is Pepsi (NYSE: PEP) and after a closer look, it seems more like friendly competition than a fierce fight for market share. Perhaps you need to look no further than Coke for the next high growth stock.
Franchise value, economies of scale, and durable competitive advantage all essentially translate to the same thing, which is operating with a wide economic moat to ward off competitors. Warren Buffett, an owner of Coke common stock, likes to invest in companies that operate with a wide and ever-expanding economic moat that makes it impossible for competitors to gain valuable market share and industry growth.
A quick look at the energy drink market further illuminates Coke’s supreme economies of scale. Within a relatively short period of time after the dawn of energy drinks, Coke immediately developed Full Throttle to directly compete and gain market share. In fact, you could also say that Coke relatively controls product innovation and development in the soft drink industry.
Consequently, Coke may be one of the best examples of companies operating with a durable competitive advantage. Coke’s distribution ability, superior management, and excellent product innovation truly make the company a “business castle” with a wide “economic moat” that not even the bravest army would dare attack or attempt to swim across. After all, you can’t swim across a never ending moat.
Disclosure: Long BRK.B