In the investing world investors prefer to look for companies where there is supply side dominance.
In simple terms supply side dominance, as the name suggests, means that the supply of the particular good or service is controlled or provided by few suppliers. Reasons could be due to logistical advantage, superior quality, trust built up over the years, etc.
Whenever I hear this term the best example which comes to my mind is of APL Apollo which is in the business of producing structural steel tubes.
They took a few small steps which compounded and led to them becoming the market leader. The following helped them to build their competitive advantage:
- Buying in bulk provided them a huge cost advantage over others.
- They started making products where there was no competition, which is the reason they had 1500+ SKUs.
- Largest distribution system very important in the steel tubes or pipe segment
- Brought in DFT technology with an exclusive contract which helped them produce steel tubes faster and different sizes easily.
- Strong balance sheet meant they didn’t have to rely on loans and even if they did they were at cheaper rates than the competition.
Therefore, a supply side dominance can be created by (not an exhaustive list):
- Being the lowest cost producer where you can price your goods lower than competition and still maintain your margins
- Deal in products where quality of product is important rather than price for the end user
- Having a distribution system which can deliver the goods faster to the customer hence building a preference for your business over others
- Creating relationships with the customer which helps them bring back to you.
Carl Gustav Jacob Jacobi, who was a famous German mathematician, used to follow the strategy of “Invert, always invert” and the same has been profounded by Charlie Munger.
By inverting the questions comes, what can be the opposite of supply side dominance?
I feel the gold loan industry can be an example of it.
Before the pandemic the banks were not very much interested in providing gold loans to their customers as it is an operational heavy business.
You need physical lockers to keep the gold with extra security and insurance on the same. Plus, relatively, they are not high ticket loans hence requires more churning rather than one time giving out loans.
It’s always more lucrative for a bank to earn 4-5% on a home loan which is a high ticket loan rather than on a small gold loan. But then why has there been a sudden surge in competition in the gold industry by banks? The reason being gold loans are one of the safest loans out there. It is highly liquid, the value of gold is independent of its owner, and it is in the possession of the lender.
As the pandemic made a lot of things uncertain, gold loans were the safest option for the banks to look at. Therefore, the supply for providing gold loan in the industry increased substantial and the NBFCs which were lending at 24-25 % yields faced huge pain.
This concept can also be applied in your life towards how you make your choices.
When there is limited “supply” of anything in your life you end up compromising and adjusting to that option even when you would know that you deserve better.
Think about friends.
Many people face this problem when they are still friends with a person who is toxic because they are afraid of being alone. They don’t want to go through the process of knowing someone and getting close to them again, which makes sense.
But if one has more than one close friend the probability of moving out of that toxic friendship increases as the fear of being alone reduces. (As supply side increases…)
Same is very true for toxic relationships where one partner can be mentally abusive but they don’t end such a relationship as they fear being alone or starting the process of knowing someone again from the start. Even though reading this might sound dumb and you would be wondering why would anybody do that, but the truth is fear of being alone is a real thing and people go to the extent of being in toxic relations to avoid such feeling.
If you have seen How I Met Your Mother, you would have come across The Mermaid Effect which can be a relatable concept to this post.