The Wonderful Business Of WD-40

There is a company in the United States called the WD-40 Company (NASDAQ: WDFC).

For much of its history, the company has been a one product company. The company is the owner of the product of the same name, WD-40. WD-40 is a lubricant that removes rust, stop squeaks and unfreezes joints. It is a product no handyman can do without.

At its peak, it was estimated that 4 out of 5 families in the US owned at least one bottle of WD-40. The company has also been able to consistently earn above average profit margins, 25%-30% of its operating profit margin, for the most part of the past decade. Yet, the product, WD-40, is not even patented.

How did the company maintain its success? And is there such a company in Singapore?

Barrier of entry

First and foremost, you must have a good product or service. Of course, having a good product does not necessarily mean that the company creates a high barrier of entry for competitors. If a company is able to invent and produce an efficient product, there is no reason why its competitors are not able to do the same.

However, the conditions that WD-40 has created for its customers has carved out a strong barrier to entry for itself.

1)      Decades of advertising to build customer awareness

2)      Good feedback from customers to build loyalty

3)      Low selling price (normally below US$3.00 a can)

Due to the already low selling price of the product, existing customers are unlikely to switch to a cheaper product. Also, for competitors to successfully penetrate the market, they will likely have to spend a lot of ad dollars and possibly price their product at a loss in order to gain a new customer base. It just does not make economic sense for a newcomer to enter the market. This has allowed WD-40 to retain its market share over the years.

The strong economic moat of the company shows on its share performance over the long term. The company’s share price has risen from about US$4.00 per share back in 1978 to more than US$67.00 per share. That is an average yearly gain of 8%, excluding its consistent dividend payout to its shareholders.

Is there such a company in Singapore?

It is not easy to find such a unique company.Would you count Super Group Ltd. (SGX: S10) as one of the possible candidates? Super Group’s coffee has a strong brand loyalty amongst its customers, some of whom have been drinking their coffee for decades.  Or maybe Eu Yan Sang International Ltd. (SGX: E02)? Eu Yan Sang is considered by many to be a trusted brand in traditional Chinese medicine. Or who hasn’t heard of the Gardenia brand of bread from QAF Limited (SGX: Q01)? It’s been serving breakfast to generations of Singaporeans. All these brands might have some form of a barrier to entry into their industries, but the jury is still out on whether they have achieved the same level of customer “stickiness” as WD-40.

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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 does not own any company mentioned above