I haven't done or seen the quantitative analysis you are referring to (would be very interesting to see!) but your piece reminded me of reading the Nick Sleep letters. He was early into Costco and Amazon, and his basic thesis was to identify retailers who were focused on offering a better value proposition to customers and thereby achiev…
I haven't done or seen the quantitative analysis you are referring to (would be very interesting to see!) but your piece reminded me of reading the Nick Sleep letters. He was early into Costco and Amazon, and his basic thesis was to identify retailers who were focused on offering a better value proposition to customers and thereby achieving a flywheel effect rather than optimizing near-term profit. Costco, for example, famously manages to a fixed gross margin on goods sold and passes all savings they get from scale onto the consumer. This could be thought of as "investing through the income statement" except it would be very hard to identify quantitatively because the investment comes in the form of intentionally suppressing gross margins! Once a business like Costco reaches a certain scale then they become very hard to catch as they have the best ability to invest in technology and negotiate with producers. Walmart seems to have been a very similar case to Costco. Amazon is the same flavor but a little different: instead of optimizing on price they seem to plow their gross profit into R&D and their distribution system allowing them to dominate on convenience. Another key to this model is that, because profits are kept artificially low, the stocks tend to be cheap and any share repurchases are more impactful.
I think the key thing to look for is a player that has reached the largest scale in its market and is laser focused on growing revenue rather than growing operating margins. The market must also have some kind of benefits to scale. After such a business gets a significant lead their moat becomes very strong and their expansion across the country/world becomes inevitable.
I haven't done or seen the quantitative analysis you are referring to (would be very interesting to see!) but your piece reminded me of reading the Nick Sleep letters. He was early into Costco and Amazon, and his basic thesis was to identify retailers who were focused on offering a better value proposition to customers and thereby achieving a flywheel effect rather than optimizing near-term profit. Costco, for example, famously manages to a fixed gross margin on goods sold and passes all savings they get from scale onto the consumer. This could be thought of as "investing through the income statement" except it would be very hard to identify quantitatively because the investment comes in the form of intentionally suppressing gross margins! Once a business like Costco reaches a certain scale then they become very hard to catch as they have the best ability to invest in technology and negotiate with producers. Walmart seems to have been a very similar case to Costco. Amazon is the same flavor but a little different: instead of optimizing on price they seem to plow their gross profit into R&D and their distribution system allowing them to dominate on convenience. Another key to this model is that, because profits are kept artificially low, the stocks tend to be cheap and any share repurchases are more impactful.
I think the key thing to look for is a player that has reached the largest scale in its market and is laser focused on growing revenue rather than growing operating margins. The market must also have some kind of benefits to scale. After such a business gets a significant lead their moat becomes very strong and their expansion across the country/world becomes inevitable.
Thanks for this.
I just went and downloaded the letters.