Editor’s Note: Rock the moat

June 18, 2018 -  By

Imagine your business is a castle. Does it have a moat?

According to Warren Buffett—renowned investor and chairman of Berkshire Hathaway—businesses worth investing in have significant buffers to keep their opponents at bay. In other words, a company with a moat has a competitive advantage so great, it allows for above-average profits and long-term returns to investors.

Economic moats were in the headlines (and tweets) last month, when SpaceX founder Elon Musk criticized Buffett’s emphasis on economic moats. He called it “quaint” and “lame,” saying the pace of innovation is more important. Their spat was about See’s Candies, which Berkshire Hathaway acquired in 1972. It’s reported to have a moat thanks to its quality, price, distribution process and retail experience.

Regardless of the billionaires’ stances on moats vs. innovation—which, by the way, do not need to be mutually exclusive—the conversation made me think about the landscape industry and our LM150 list of largest landscape companies, featured in this issue. Do any of these companies have wide moats?

Experts say there are several paths to building a moat, such as:

  • Maintaining low operating costs or achieving economies of scale. This approach, favored by Walmart, allows the company to undercut competitors;
  • Creating a network effect, where a company’s products or services become more valuable the more people use them (think eBay);
  • Having high switching costs, which makes it difficult for customers to move to a competitor (some software programs fall into this category); or
  • Possessing “intangible assets,” which may include intellectual property like patents and trademarks, brand equity or culture.

In our industry, which has a notoriously low barrier to entry, a moat couldn’t be more important. Companies with moats have pricing power, which Buffett has said is one of the most vital factors in evaluating a business. “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business,” he told the Financial Crisis Inquiry Commission in 2010. “And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

Among the ways to achieve a moat, the pursuit of lower operating costs appears to be the greatest opportunity for landscape and lawn care companies.

Many companies in the industry say they prioritize efficiency and lowering costs, but I’m surprised at how much low-hanging fruit is out there. For example, many companies—even some on the LM150 list—are still slow to adopt technology like GPS and software to automate office functions.

Though we’ll likely never know whether Buffett would give any companies in the landscape industry moat status, I’d say the companies we feature in this issue’s LM150 supplement are moving in that direction. They are fortifying their businesses through various tactics, including employee education and training; incentive programs; and more. See the list and read the stories of four of these firms.

This article is tagged with , , and posted in 0618, Editor's Note
Marisa Palmieri

About the Author:

Marisa Palmieri is an experienced Green Industry editor who's won numerous awards for her coverage of the landscape and golf course markets from the Turf & Ornamental Communicators Association (TOCA), the Press Club of Cleveland and the American Society of Business Publication Editors (ASBPE). In 2007, ASBPE named her a Young Leader. She graduated with a Bachelor of Science in Journalism, cum laude, from Ohio University’s Scripps School of Journalism.

1 Comment on "Editor’s Note: Rock the moat"

Trackback | Comments RSS Feed

  1. Joe Frisbie says:

    You are correct the world is changing and the landscape industry is slow to adopt, robotic mowers, alternative fuels including electricity, the elimination of toxic chemistries, and attention to advances in the fields of microbiology, soil sciences, water conservation and hydrology and the incorporation of SaaS. All of these are ways to differentiate.

    To often efficiency and lowering cost is code for underbidding, under performing and under paying. This leads to customer dissatisfaction because the personnel are poorly trained and under pressure to stay on target to an artificially low margin. Greatest example is “Irrigation Technicians” compared to plumbers. All the same principles of hydraulics apply yet the pay scales are multiplies of differential.