MENU

4 Types of Economic Moats That Companies Can Have

The term “economic moat” was popularised by Warren Buffett. The term takes its roots from the deep, water-filled moat that surrounds a castle, designed to protect against invaders. Similar to these traditional moats, companies that have “economic moats” have competitive advantages that protect them from competitors.

There are a few ways that a company can develop economic moats in their business. In an earlier article here, I described two economic moats, namely, low-cost advantage and network effect. In this article, I will take a look at more two types of economic moats.

Patents and licences

Governments heavily regulate some industries. They might be required to earn licences before they can operate in such industries. For instances, banks hold special licences that allow them to offer loans and provide financial assistance to individuals. This is a highly regulated industry, and the banks need to follow protocols in order to continue to operate.

Although this may be tedious for the business, the licences provide them with an advantage over any competitor who is trying to muscle its way into the industry. Because of this regulation, it is difficult for competitors to enter the market and this protects them from competitors.

Patents also shield businesses from competition. This is especially prominent in pharmaceutical companies who have spent time, money and effort developing new drugs. Patents provide the companies with sole rights to sell the drug that was developed and shield them from any copy-cat competitors.

Branding

Consumers are often seduced by the power of a brand. They may be attracted to the prestige or the assurance that a strong brand can provide. We need not look any further than the phone we carry around every day as an example. Most of us continue to buy the same brand of phone over and over again. We usually do so because we trust and recognise the brand of the phones we use.

The same goes for other industries such as apparel, fast food and even soft drinks. Branding creates customer stickiness and prevents customers from easily switching to competitors’ products. This type of economic moat is vital to any consumer business.

The Foolish bottom line

As investors, we should not undervalue the advantage of an economic moat. Economic moats can keep a company thriving in the long-term and help to expand its business in the future, even in harsh economic conditions.

Worried about the overall state of the market? Do you know the 1 thing you should never do in the stock market? The Motley Fool Singapore's new e-book lays out a plan to handle market crashes, details the greatest advantage you have as an investor, and looks at decades worth of market data to bring you the smartest insights on investing. You can download the full e-book FREE of charge--Simply click here now to claim your copy

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.