One of Warren Buffett’s best-known expressions is “economic moat”. It refers to some companies’ ability to maintain competitive advantages over their rivals, helping them protect their profits and market share. An example of a company with an especially wide moat is Coca-Cola, in which Buffett’s investment vehicle, Berkshire Hathaway, has a $24.8bn stake.
Buffett first paid $1bn for a 6.2% stake in Coca-Cola in 1988 after the shares had fallen in the 1987 stockmarket crash. He felt it was a good company with a wide moat and was poised to recover. Buffett’s confidence in the firm was well founded. Coca-Cola’s shares rose 26-fold between May 1988 and April 2022. The company’s wide moat is based on it having the world’s strongest brand, while its massive size and geographic reach help it keep a lid on costs through economies of scale.
Five crucial characteristics
The five main sources of a wide moat are intangible assets (brands, patents, exclusive licences and the like); a cost advantage; switching costs (that make it expensive or laborious for customers to change supplier); network effects (meaning a product or service becomes more valuable the more people begin to use it) and efficient scale (markets such as water supply that are best served by one or two companies in a given area). A firm with a wide moat often has two (Coca-Cola, for instance), or even three, of these factors contributing to its moat. The following examples illustrate these five
