In the age of disruptors like Amazon and Uber the choice between companies in which to invest and those to avoid has never been so important according to Kames Capital’s Craig Bonthron.
Bonthron, the co-manager of the Kames Global Sustainable Equity Fund, says Amazon is the poster child of disruptors but there are also many others with ability to disrupt established brands. These Tech disruptors, with their global search algorithms and cloud based platforms have driven greater transparency in the supply chain and threatened many incumbents in well-established industries.
He says: “Bricks and mortar retailers, industrial distributors, previously imperious consumer staple brands and TV networks are all feeling the heat. From positions of high margins and returns earned via opaque pricing models or scale dominance, these companies are staring at strategic dilemmas, as the costs of deploying new technology is getting cheaper and more scalable, and the internet giants highly public price transparency is deflating prices now and depressing future expectations.”
The conundrum now facing many investors is which of the incumbent companies are disruptable or ‘Amazonable’ and which are able to weather the storm.
According to Bonthron it is the established companies with big addressable markets and high returns on capital that are most disruptable.
He says: “When looking at companies that won’t be ‘Amazoned’ we look for the following characteristics – good vertical integration, controlling production distribution and customer relations, they offer customer price transparency, maintain high customer contact and offer high value products with an associated strong brand.”
Bonthron adds: “Companies with these characteristics tend to exhibit the best pricing power. Businesses that have horizontal business models, opaque pricing and high returns are at risk, particularly if they are valued for their stability of earnings. This stability premium can quickly be eroded if a disruptor enters its market.”