This week, my colleagues and I at The Motley Fool Singapore got a chance to tour instant beverage maker Super Group’s (SGX: S10) factory in Malaysia.
But before I share more about what I had learnt in the tour, I have to first make a confession: I have never enjoyed Super Group’s instant coffee (a key part of its business) under brands such as Super Coffee and Owl. And since we’re on the honesty-page, I’d also like to admit that before the tour, I did not know much about Super Group and had even thought that the company does not really seem to possess any strong competitive advantages around its businesses.
Nonetheless, if I had to make a guess as to where Super Group’s competitive advantage or economic moat might exist, I would have pointed to the company’s various branded consumer products due to the fact that the company is putting in constant effort to build its brands.
After the tour however, I realised that I might be wrong about some of my assumptions about the company. For instance, Super Group might actually have a strong economic moat around its Food Ingredients business as well.
What is this Food Ingredients business all about?
Super Group sells instant coffee powder and non-dairy creamer to other beverage manufacturers as part of its Food Ingredients offerings. Previously, I had always assumed that those products are commodity-like and what matters most to customers is food safety and pricing.
However, what I learnt during the tour is that there is a strong research and development component to it. Basically, Super Group can mix and match its formulas to suit the customers’ specifications for food ingredients; such customization is only possible because Super Group has its own R&D department.
Once a customer is satisfied with the final product, Super Group will then manufacture the specially-formulated ingredient for the customer. Interestingly, there’s a chance you’ll find that branded coffee products from some famous cafés or restaurant chains might actually be manufactured by Super Group.
But in any case, the end result is this: If the product is great, customers will most likely not want to switch manufacturers just to scrimp on a few dollars here and there. After all, no one would really want to mess with the “Magic Formula.”
A rare ability to customise
That said, what’s to prevent other non-dairy creamer or instant coffee powder manufacturers from stealing Super Group’s thunder? Turns out, not many competitors in the region have the company’s ability to engage in extensive R&D work to allow for customisation. According to Super Group’s Investor Relations Manager, Ms. Candy Chng, only Nestle and Kerry Group have the R&D capabilities to create such specialized food ingredients for their customers.
The tour has opened my eyes to the value of Super Group’s Food Ingredients business. What I had previously thought to be a business that deals with low value-added commodity-like products actually turns out to be a business that has a strong economic moat. In fact, it might even be the crown jewel of the company, in my opinion.
Ending with the honesty-theme I started with, I have to say that I’ve changed my mind slightly about the company this week after the tour. But, that’s not enough for me to change my taste in coffee for I’m still sipping my good old Oldtown Instant Coffee while I wrap up this article.
Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.
The Motley Fool’s purpose is to help the world invest, better. Like us on Facebook to keep up-to-date with our latest news and articles.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.