The new breed of companies, like Netflix, Uber, Amazon and Airbnb, might be the flavour of the month with investors, but to dismiss the incumbents is to do so at considerable risk.
This was one of the key messages from Elston Asset Management’s Andrew McKie (CEO and portfolio manager) and Grayden Taylor (portfolio manager), speaking at the IMAP Investment Forum in August.
“The ‘disruption thematic’ is driven by technology,” Taylor said. “These new breed of companies rely on technology to give them a global reach, which allows them to grow their brand quite quickly. They have also had access to a decade of cheap money, which has help fund their growth.”
But even though these new breed of companies have leveraged their growth and marketshare on the back of technology, McKie cautions to not discount the incumbent players in the market facing off these digital challenges.
Mckee said Elston had identified opportunities with some of the incumbents, based on the following four points:
- As they already had a network of established customers, they had zero customer acquisition costs;
- They typically were financially strong, and didn’t have to fund a new start-up offering;
- They leveraged fixed software costs; and
- They were embracing innovation and seeking to improve the customer experience.
Taylor identified Woolworths, Flight Centre, Tabcorp and Telstra as good examples of incumbents taking on the digital disruptors.
“Amazon’s entry into the Australian market last year was seen as a direct threat to Woolworths,” Taylor said. “At the time, Woolworths had dropped its guard and was struggling with the failed Masters Home Improvement venture. Analysts believed Amazon Fresh would gain marketshare quickly against a weakened Woolworths, but it played out differently.”
According to Taylor, despite its problems, Woolworths still had a strong brand in the market, with a loyal client and supplier base. And with Woolworths’ established chain of warehouse distribution centres, as well as store locations, Amazon simply couldn’t compete.
“When faced with these factors from the incumbent, Amazon realised it was too difficult to compete against Woolworths, which demonstrates the issues investment managers and investors need to consider when looking at these ‘disruptors,” he said.
Taylor also used Flight Centre as another example of an incumbent facing off against the online offerings of Webjet, Expedia, TripAdvisor and Trivago.
“Flight Centre is succeeding against these online companies because people still enjoy the experience of face-to-face interaction with an agent. This is something that’s difficult for a digital offering to replicate.”
Taylor also remarked that Flight Centre had specifically targeted the corporate market and had developed a digital platform across its global network, to ensure it was keeping up with developments in technology.
“The incumbents that fall by the wayside, will be the ones that don’t innovate,” Taylor said. “Just look at the banks. They have responded well to changes in technology by embracing it. Online banking has been hugely successful, as it’s enabled them to transition customers from branches to online.”