There are around 25 dominant franchises in the BSE500. Most of them have been created by “Unusual Billionaires – promoters or CEOs who saw their sectors through a very different lens than everybody else and then proceeded to flip the competitive paradigm to create an enduring competitive advantage. “…And they shared an interesting set of personal characteristics in addition to some of the specific business actions they took. So they were, as a group, humble and frugal by nature. And sort of patient and pragmatic, in terms of their mindset. They were not overly charismatic, and they were not active seekers of the limelight. They did not speak at Davos. So Buffett is far and away the best known. Many of the other CEOs are virtually unknown today.” – William Thorndike, author of “The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success” (2012) (Source:https://hbr.org/2014/04/how-unusual-ceos-drive-value
The book and the film raise interesting issues
Last week we released a short film explaining how yours truly ended up writing the “The Unusual Billionaires”. The film contained short interviews studded with nuggets of wisdom from two of The Unusual Billionaires, Harsh Mariwala (Chairman, Marico) and Kuldip Singh Dhingra (Chairman, Berger Paints). Click here to watch the film: https://www.youtube.com/watch?v=4XKpz8ZdVIo&feature
Reflecting on his decision to let professional executives run Berger Paints from Kolkata whilst the Dhingra family maintained oversight from Delhi, Mr Dhingra says in the film that “the only sustainable way [to build a great firm] is to make it some kind of institution so that there is continuity and the [promoter] family can reap the benefit…it is a price to pay for sustainability. It was not a choice to tell you the truth.” In a similar vein, Mr Mariwala explains in the film why in 2014 he did that rare thing for an Indian promoter – stepped down as Managing Director and made way for a professional executive, Saugata Gupta, now MD & CEO of Marico. [Square brackets are our insertions.]Thinking differently (from the herd) is difficult
Until we stumbled upon William Thorndike’s “The Outsiders” in 2013, we used to think of outstanding franchises in terms of the standard business school paradigm of competitive advantages. Thorndike’s book, which lit the creative spark for “The Unusual Billionaires”, gave us another perspective with which to understand great franchises. That perspective was the personality of the promoter.If you dig a little deeper at the businesses which feature in both of my recent books – The Unusual Billionaires (2016) and Coffee Can Investing (2018) – you will see that most of them are dominant franchises almost verging on monopolies. In fact, these dominant franchises can be classified into two buckets:
· Franchises whose monopolies are predicated on rules & regulations which help them erect invisible barriers to entry. These are often the most powerful, the most lucrative monopolies.
· The remaining dominant franchises are created due to a promoter/CEO viewing the competitive paradigm very differently from everyone else in the sector and then proceeding to flip the competitive paradigm in his favour. This aspect of the Unusual Billionaires continues to fascinate us. Let us illustrate with a couple of examples.
Until the 1960s, paint was sold just like a normal FMCG product i.e. from the factory the product would go to the wholesaler, then the distributor and finally to the dealer. In the late 1960s, Champaklal Choksey, the dominant founder-promoter of Asian Paints until his death in 1997, turned this paradigm on its head.
Mr Choksey got rid of the wholesalers and the distributors of Asian Paints and started selling direct to the firms 50,000 dealers. The remarkable distribution network that Asian Paints built in the late 1960s means that even today, paint is a unique sector in four different ways: (1) Paint is the only sector in India where the product goes straight from the manufacturer to the dealer; (2) Paint is the only sector where the dealer’s shop is replenished multiple times in the same day; (3) Paint is the only sector where the manufacturer (Asian Paints) earns 97% of the retail price of the product [in all other products the channel accounts for 30-40% of the retail price]; (4) Asian Paints’ distribution logistics are still unmatched. So, whilst HUL, India’s largest FMCG company, has 7000 distributors to whom it delivers once a week, Asian Paints delivers to nearly 50,000 dealers four times a day!
Behind this remarkable network architected by Champaklal Choksey, is 50 years of proprietary data on paint demand for each neighbourhood in India, for every hour of the day, for every day of the year. That allows Asian Paints to forecast your paint demand just like Amazon can second guess what you will buy when you visit their website next. Asian Paints’ proprietary data, its forecasting ability and its distribution network give it a working capital cycle of 8 days. Nobody else in the paint sector comes remotely close to Asian Paints on this metric. As a result, Asian Paints ROCE (usually at around 30%) and free cash flows are head and shoulders above its rivals. Over the past 20 years only one other paint company in India has been able to keep up with Asian Paints and we own that as well in our Consistent Compounders Portfolio.
What Mr Choksey did to paints, Aditya Puri did to private sector banking in India. When HDFC’s Chairman, Deepak Parekh, hired him from Citi in Malaysia, Mr Puri started life in HDFC Bank in 1994 much as Citibankers usually do – extend corporate loans and keep NPAs low. Then as banking IT systems evolved in the late 1990s and as a common core banking solution operating across the entire HDFC Bank network came within his grasp, Mr Puri did the paradigm flip and started building HDFC Bank’s Current & Savings Accounts (CASA) machine. He realised that if HDFC Bank could hoover up corporates’ current accounts and affluent individuals’ savings accounts at modest cost (around 4%) the bank could access funds which were not just low cost but also stable. Once this was achieved, HDFC Bank could focus on lending to the safest segments of the economy at 8-9% and still clock a Net Interest Margin significantly in excess of 4% points. Only one other bank in India has metrics comparable to HDFC Bank and we own that as well in our Consistent Compounders Portfolio.
As with Asian Paints, a good plan, an ingenuous strategic insight is one thing – relentless execution of that plan marks out both Asian Paints and HDFC Bank. For decades, both firms have stuck to a relatively simple script and built their market leading franchises.
How can we make it easier for ourselves to think differently?
“The writer-physician Atul Gawande has written about the phenomenon of ‘positive deviants’ in the medical profession, that small set of players who are mired in the same environmental conditions as everyone else but stubbornly refuse to allow themselves to be constrained by conventional wisdoms, and as a consequence are able to identify fresh and often counter-traditional ways to address seemingly intractable problems. In business, I believe that there will always be positive deviants, brands that are exceptional, not because they are able to run harder or faster than the rest, but because at some fundamental level they have made a commitment to not taking the status quo for granted.” – Youngme Moon in ‘Different: Escaping the Competitive Herd’ (2010)
Why is it that a small minority of business leaders are able to see the world through a very different lens? Re-reading The Outsiders and The Unusual Billionaires points to three factors:
1. Most of us are social creatures who feel the need to belong to a larger group; thanks to millions of years spent in the jungle, we feel safer if we are part of a larger tribe. That instinct makes us hug consensus opinion and mainstream culture. The makes it harder for us see the world differently. Basically, thanks to evolutionary forces, our genetic wiring makes us see the world through the same lenses as everyone else. An Unusual Billionaire is therefore, more likely than not, to be an Outsider, an independent, iconoclastic thinker.
2. Even if we have the vision to see things differently, it takes a few more dollops of courage to go forth and execute relentlessly on this differentiated vision. Not only is their the fear of ridicule if we fail, there is also the small problem of not having anyone to turn to for advice when you run into a problem. After all, if you are the first person on the surface of the moon, you can’t call up a 0800 number and report a faulty oxygen tank! An Unusual Billionaire therefore needs to view risks very differently from the rest of us.
3. Not only does an unusual billionaire have to have the courage to traverse the path less trodden and the patience to relentlessly execute, the Unusual Billionaire also has to demonstrate what William Thorndike calls “crocodile-like temperament that mixes patience with occasional bold action” i.e. stay still for as long as possible and then move rapidly & decisively.
Thorndike summarised the unique characteristics of the Outsiders/Unusual Billionaires nicely in the HBR interview which is referenced right at the beginning of this note. At the core of exceptional businesses are exceptional men & women. Meeting them and learning from them makes working in Marcellus the world’s most interesting job.
To read our other published material, please visit https://marcellus.in/resources/
Saurabh Mukherjea is the author of “The Unusual Billionaires” and “Coffee Can Investing: the Low Risk Route to Stupendous Wealth”.
Note: the above material is neither investment research, nor investment advice. Marcellus does not seek payment for or business from this email in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services and as an Investment Advisor.
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