“The single most important decision in evaluating a business is pricing power,” Buffett told the Financial Crisis Inquiry Commission in an interview released by the panel last week. “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.” (read here)
I reckon the ability to raise price is closely related to how strong the company’s moat is. I have previously written a post on business moat. (read here) Of course if the business moat here is about driving costs down and being a low-cost leader, then pricing power may not be that relevant (in fact raising price will be contradictory to the strategy).
Interestingly, Straco has recently announced that their Aquariums will adjust ticket prices upwards. (read here)
Looking at my own portfolio, which of the company can do the above mentioned? Eg. ability to raise price. Frankly I can only think of Vicom (esp. for its Vehicle Inspection segment). There are a few companies that came quite close but not as “powerful” :P….
Vicom’s business can be split into Vehicle Inspection & Non-vehicle testing & inspection.
1. Vehicle Inspection:
- The company runs seven out of the nine vehicle inspection centres here. Being the major player in the duopoly, Vicom would easily be the price setter while STA would be the follower.
- Vicom inspection centres are also strategically located in Singapore to capture most of the potential customers (read here).
- According to analysts, as of 9 May 2014, the last time Vicom had raised fees was in 2006. Any potential fee hikes could be a boon for the company (read here).
2. Non-vehicle testing & inspection
SETCO’s business requires a bit more explanation.
- SETSCO is the sole provider of inspection services in the Pressure Vessels and Lifting Equipment category for air receiver, tank and chain block.
- SETSCO also participates in the building construction and maintenance inspection, competition is slightly lesser with around 2-3 competitors in each of its accredited inspection area. Inspection is a recurring income as under the Building Control Act, a building that is not solely used for residential purposes will need to be inspected every 5 years from the date of TOP and 10 years for residential building.
- SETSCO’s strength lies in it having the most number of accreditations in the whole range of services.
- Customer loyalty tends to be high as it may be costly and time consuming to switch between such service providers, and even more so in specialized cases that can only be delivered by a few certification companies.
Personally, I feel reckon that there are other companies in my portfolio that are close (to having full power to raise price effortlessly) but they do have the full pricing power. See below:
Nitrile gloves contribute like >90% of Riverstone Revenue. The main argument for Riverstone’s ability to raise price is that in comparison to its competitors (Kossan and Supermax), it is able & willing to meet customer’s needs for customization. Niche business provide strong moat
However, Riverstone faces stiff price competition in the healthcare segment. In addition, there might be potential overcapacity in the healthcare segment.
Market leader in the Repairs & Redecoration (R&R) and Addition & Alteration (A&A) segments in public sector projects in Singapore.
Demand for R&R services is inelastic, protected by legislation requiring external walls of buildings to be repainted at least once every five years. With an exclusive license to apply paint works for SKK and Nippon Paint Singapore in the public sector, ISOTeam’s market position is further entrenched.
However, ISOTeam’s market is highly regulated. Although they may not be the lowest bidder for some of the projects won by them (read here), but they could nevertheless be among the lowest bidders. ISOTeam’s brand reputation and the premium it commands in the market may not justify a 10 percent price increase over its competitors in the low cost public sector market.
c) Sarine Technologies Ltd
Sarine has revolutionised the diamond manufacturing industry by introducing computer-based technology to automate many of the processes of this highly concentrated expertise. However, its business revolves within the price differentiation between rough and polished diamonds. In gist, it is questionable for it to raise prices for its products if there are less incentives for manufacturers to produce finished products eg. polished diamonds.
- A near monopolistic position in diamond planning and manufacturing equipment with superior proprietary technology (read here) It is dominating in its space in the middle segment of the diamond value chain, with its revolutionary Galaxy systems for automated rough diamond inclusion mapping, planning systems, cutting and shaping, polishing, cut grading to laser-marking and inscription systems.
- Sarine is capitalising on the ongoing lack of meaningful competition for inclusion mapping systems in the market to deepen Galaxy penetration (read here). Galaxy/Solaris inclusion mapping systems are the only products in the market that offer manufacturers a fast, automated and comprehensive mapping of diamond inclusions. (read here)
- Sarine Loupe system provides unmatched detailed imagery which allows the buyer to virtually inspect the diamond from a multitude of angles and at various magnifications, even beyond what would be possible with the diamond physically in hand.
- Sarine has a market presence in both established and emerging diamond manufacturing centres. A key development for us in 2004 was the establishment of Sarine India, their wholly-owned subsidiary. With operations in the key diamond processing centres of Mumbai and Surat, Sarine now have full control over the business direction and marketing of their products in the key Indian market.
- However, if De Beers (which controls around 60% of all the rough diamonds in the world) increases the price of rough diamonds significantly, the difference between the prices of finished diamonds and rough diamonds will narrow. This will in turn reduce the incentive for manufacturers to produce finished products. Subsequently, Sarine’s suite of equipment will be less in demand. (read here)
SMRT is actually quite close to being a “perfect” business.
SMRT is in an industry (the provision of rail and bus services) with a high barrier to entry and it’s providing a vital service for the public. However, SMRT’s market is anything but unregulated and it seems there is still a long way from it ever becoming unregulated. It is unable to raise prices without government intervention. (read here)
In gist, despite the competitive environments these companies operate in, most of them are able to have a competitive edge over their rivals. However, in many cases the macro environment has an over-riding effect / influence on their ability to raise price.
Imagine we are having a property slow down now – it takes an exceptionally brilliant project to sell well. Or even to raise price without worries. Or any oil & gas companies to raise their price for that matter.
And if we do find these exceptional business, it is best to be patient and buy these wonderful companies at a fair price.