Thanks very much for your kind words Karen & Roger! Hopefully I am not barking up the wrong tree here, time will tell, but its all good learning ! :) I was trying to add to the discussion but it appears I killed it..! :ohmy:
I have been doing some research and with a view to adding some more thoughts to the table for anyone interested, I thought I would post the highlights from today's research here for others to peruse. Hopefully it will stimulate more discussion...
While further researching my thoughts on competitive advantage (influenced by Michael Porter’s five forces and even more so by Bruce Greenwald’s Competition Demystified) I came across these two articles which I believe are perfect for anyone eager to learn more about Moats/Sustainable Competitive Advantages:
http://www.capatcolumbia.com/Article...ingthemoat.pdf
http://www.capatcolumbia.com/reading...y_is_Local.pdf
And in reference to my original post, here are two excerpts from Bruce Greenwald’s fantastic book Competition Demystified (not the articles above) that I think are most relevant to the discussion and to RYM:
So how does this specifically relate to RYM? The most obvious, and (in my opinion) the most important, are the following:Quote:
Barriers to Entry & Competitive Advantages
“Barriers to entry lie at the heart of strategy. The skills and competencies of even the best-run companies are available to competitors, at least in theory. Systems can be replicated, talent hired away, managerial quality upgraded. All these are ultimately parts of the operational effectiveness of the company. Strategy, on the other hand, is concerned with structural barriers to entry. Although often treated as separate aspects of strategy, barriers to entry and competitive advantages are essentially alternative ways of describing the same thing”
“There are really only a few types of genuine competitive advantages. Competitive advantages may be due to superior production technology. They may be due to customer preference (demand advantages) or they may be combinations of economies of scale with some level of customer preference. Measured by potency and durability, production advantages are the weakest barrier to entry; economies of scale, when combined with some customer captivity, are the strongest.”
Economies of Scale & Customer Captivity
“The competitive advantages we have described so far are uncomplicated. An incumbent firm may defeat entrants either because it has sustainable lower costs or, thanks to customer captivity, it enjoys higher demand than entrants. Together, these two appear to cover fully the revenue and cost elements that determine profitability. But there is an additional potential source of competitive advantage. In fact, the truly durable competitive advantages arise from the interaction of supply-and-demand advantages, from the linkage of economies of scale with customer captivity… …the competitive advantage of economies of scale depend not on the absolute size of the dominant firm but on the size difference between it and its rivals, that is, on market share. If average costs per unit decline as a firm produces more, then smaller competitors will not be able to match the costs of the large firm even though they have equal access to technology and resources so long as they cannot reach the same scale of operation.”
Economies of Scale / Production Advantages
- The aged care industry has compelling structural factors that are ideal for economies of scale advantages to exist i.e. very high fixed costs; the more units built, the lower the cost of each unit - it has been noted that RYMs new villages are increasing in size – further entrenching their scale advantage.
- The suppliers to RYM are commodity style businesses (i.e. carpets, plumbing supplies etc) meaning RYM benefits on production economies of scale because they get their supplies cheaper (confirmed)
- RYMs vertical integration provides the real category-killer advantage of low costs due to everything being done through in-house labour, builders etc providing significantly higher margins.
Customer Captivity:
- This is where RYMs scale and production advantages interact to provide strong customer preference: They can offer the highest need-demand driven services such as dementia care and hospital beds, very profitably, where others can not make the same returns. This means they can offer the continuity of care (total exit plan for the elderly i.e. last ever move) which is such a powerful selling proposition it secures customer preference.
- Finally, the growing reputation and brand awareness of RYMs top service and ethics cements these demand advantages
Is there any evidence that this thesis is correct?
Aside from the fact that RYM has consistently earned the returns commensurate with sustainable competitive advantages (i.e. barriers to entry) there is a lot of further evidence available that RYM enjoys, and is further entrenching, a sizable MOAT:
There is historical evidence. I.e. When RYMs smaller, and only listed competitor, MET, had earnings smashed by the GFC, yet RYMs more affordable product continued to soak up demand and they actually grew cashflows during the same period.
And this recent study, The Aged Residential Care Service Review launched 8 September 2010 is the most extensive ever undertaken, and is evidence of important structural factors. the 103 page report is available here:
http://www.grantthornton.co.nz/Asset...ice-Review.pdf
(A very worthwhile read - It’s important to recognise that there are differences to more general ‘subsidised’ Aged Care and the private ‘Villages’ like that RYM offers – but of course they are overlapped and lumped together)
Here are the most relevant excerpts to my thesis (in my opinion of course!):
In Summary:Quote:
Supply of facilities
“Overall supply and renewal of facilities has slowed and needs to increase significantly to
cope with projected demand.
Demand estimates indicate that sector bed numbers need to adjust to accommodate an extra 12,000 to 20,000 residents by 2026. This includes an anticipated change in mix toward hospital and dementia care as the average population age grows.”
Costs and investment
- The financial returns being achieved by the majority of existing operators cover operating
costs. However, returns are below those an investor would require to encourage new
investment to replace aging facilities or to stimulate new capacity in rest home, hospital and
dementia services.
- Approximately half of New Zealand’s building stock is now over 20 years old (although 58%
have been refurbished to some extent) and facilities have an expected useful life of 20 to 30
years. The oldest facilities tend to deliver the lowest financial returns. It is noted that
refurbishments have generally not been undertaken to a level consistent with the Greenfield
model described in this Review.
- Earnings vary significantly and are often inadequate to cover interest and depreciation and
provide an adequate return on investment to the provider.
- The most efficient-sized facility is 80 beds plus, while half the sector operate facilities of 50
beds or less. (Note: Lack of sufficient scale!!)
- The widely recognised demographic pressure New Zealand will face over the next two decades in the over 65 aged group will place significant pressure on all services provided to older people.
With its 10% market share, RYM is by far the dominant player in a highly fragmented industry. They are responsible for greater than 50% of all new beds under construction nationwide. This signals strong growth in market share going forward.
New capacity within the industry has actually been shrinking due to substandard returns on investment in general, yet we are entering a period with a virtual tidal wave of demand.
RYM enjoys scale and production advantages that allow it to offer a complete continuity of aged care at unusually high rates of return.
As their market share and reputation grows, they are further entrenching these incumbent advantages, providing a growing economic MOAT that allows them allocate ever growing amounts of capital at very high returns.
The key benefit of scale is that they are able to offer a better product and service to customers at a cheaper price than their competitors and still achieve high returns.
In other words, significant Barriers to Entry exist for direct competitors.
Many regards,
Sauce
P.s. I am sure POSSUM won’t be arguing that RYM doesn’t have captive customers, aka prisoners… :p