We have seen secular changes in pricing power taking place. For example, the price of coffee beans has fallen sharply over the past five years but consumers have not felt the effects as service companies (the coffee shops) have actually built stronger positions. How cheap would a cup of coffee have to be to persuade consumers to change their daily routine and visit a different coffee shop from the one they regularly pass? Probably quite a lot, which serves to highlight how pricing power has shifted from the producers (the coffee plantations for example) to the service providers (the coffee shops).
Likewise, many companies are being disintermediated by technology so the price of ‘stuff’ is falling. In the meantime, however, new services are being made available for which consumers are seemingly prepared to pay more – think streaming of music content (through music streaming services) versus owning the actual music. We believe previous sources of competitive advantages will be challenged in new ways and that stock selection will have to be acutely reflective of this.
Raj Shant – Newton, a BNY Mellon company