Moats are used to protect castles from invaders in the medieval ages. Similarly, economic moats can protect companies against erosion from competitors. A company with a wide economic moat has a competitive advantage over its rivals, such that it is difficult for the competitors to encroach onto its market share.
In Morningstar’s book, Why Moats Matter, it described five types of economic moats that can protect a company against outside competition. They are network effect, low-cost advantage, intangible assets (such as brand value), high switching cost and efficient scale.
A company that possesses one or multiple traits can fend off its competitors and will less likely be made obsolete in the future. With that in mind, I want to describe two companies in Singapore that display wide economic moats that I believe will serve them well through the foreseeable future.
DBS Group Holdings Limited (SGX: D05)
DBS certainly needs no introduction. It is the biggest financial institution in Singapore and consistently ranks as one of the top 50 recognisable brands. There are two clear economic moats that DBS has built through its more than 50-year history.
For one, it displays a network effect. DBS has built up a large number of customer savings and loan accounts. As it continues to grow in scale, the bank becomes more stable and can grow its loan volume. The larger the bank, the more important it becomes in upholding the financial stability of a country. Therefore, DBS, being the largest bank in Singapore and accounting for more than 50% of the saving volume in Singapore, is a trusted bank among its customers.
With a network effect of this magnitude that is difficult to achieve, it is possible that we may never see a new retail bank in Singapore that can encroach on DBS’ market share.
The other economic moat possessed by DBS is its strong and recognisable brand. With a brand valued at US$5.4 billion in 2017, DBS was named Singapore’s most valuable brand for five straight years.
DBS has built up consumer trust among Singaporeans and in its other core market in Hong Kong. This has allowed it to grow through the years and to attract new customers and to grow both its interest income business, as well as its wealth management business.
Its highly coveted brand has not stopped management from continuing to build on its image. It recently splashed out additional marketing dollars to create a marketing video for its brand. The fact that management is not resting on its laurels suggests that the strength and resilience of DBS as a brand will continue to last for years to come.
Singapore Airlines Ltd (SGX: C6L)
Singaporeans are proud of how their flagship carrier, Singapore Airlines, has grown and is perceived around the world. It is consistently ranked among the top airlines in the world and travellers are willing to pay a premium for the comfort and assurance of flying on what is regarded as one of the safest carriers in the world.
Despite heavy competition from low-cost carriers, the Singapore Airlines brand has still managed to maintain its profitability and continues to expand its carrier count and capacity.
Together with its entry into the low-cost space (through Scoot), the Singapore Airlines group possesses brand recognition and customer appeal, allowing it to continue to thrive.
The airline industry is also further protected from the high cost of entry. This has ensured that relatively few competitors enter the space compared to other sectors. With Singapore Airlines’ large fleet and industry expertise, it is in an excellent position to capitalise on the growing air travel demand.
There are 28 surprising and important things we think every Singaporean investor should know—and we’ve laid them all out in The Motley Fool Singapore’s new e-book. Packed with information and insights, we believe this book will help you be a better, smarter investor. 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. The Motley Fool Singapore has a recommendation on DBS Group Holdings Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in DBS Group Holdings Ltd.