DETERMINING BRAND MOAT

Hi! I'm back.  My email buddy Jon had some questions about determining Moat. He wanted to know why it is that certain companies, like Panera or Starbucks, have Moat on a commonplace product like sandwiches or coffee. My explanation is below.

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On 7/29/05, Jon wrote:

Phil,

The one area that I'm struggling with a little is the moat.  Maybe it's just personal preferences.  I have the same problem with Starbucks.  I can see that they obviously have a moat, I just don't understand why.  I mean, it's just coffee.  I don't understand why people are willing to pay a premium for Starbuck's coffee vs someone else's.  I have the same problem with Panera's sandwiches.  I think they're similar to Schlotski's and to a lesser extent, Quiznos.  They obviously have some competitive advantage or they wouldn't be doing as well as they are.  But is it durable?  I don't know.  I just don't quite "get" it.

Jon

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On 8/1/05, Phil wrote:

Good thought on Moat. There are five Moats:  Price (Walmart), Secrets (patents), Switch (ADP back office), Toll (Utility), Brand (Coke, Gillette).  Clearly the first four are not moats for Panera or Starbucks...which leaves Brand.

A Brand Moat means that you can count on getting that thing the same way no matter where you buy it.  Coke in India tastes like Coke in Detroit and you're not going to get dysentery either place.  You can buy some gum you never heard of while you are traveling in Africa or you can buy Wrigleys.  You might be willing to pay an additional 20% to get what you think you are going to get.  Brand moat is key for McDonald's and when customers started to NOT get a clean restaurant and quick and happy service, McDonald's started going downhill.  They weren't delivering on the brand.  Panera is trying to build a brand that is distinguishable from Schlotzsky's.  They have clearly done so for my daughter!  Cheesecake Factory, Chico's and Whole Foods are all either national brands or building national brands.  It is a very powerful moat if they get the brand established like Coke did.

Phil