Buffett Beyond Value: Why Warren Buffett Looks to Growth and Management When Investing

Chapter 21. Who Wins in Highly Competitive Industries?

[W]e believe that [GEICO's] cost of new business, though definitely rising, is well below that of the industry. Of even greater importance, our operating costs for renewal business are the lowest among broad-based national auto insurers. Both of these competitive advantages are sustainable. Others may copy our model, but they will be unable to replicate our economies.^[174]

—Warren Buffett

Insurance is a highly competitive industry, but GEICO is far more profitable than its competitors. Retailing is also considered highly competitive, but Wal-Mart is more profitable than others. What characteristics are helpful for a company to remain a leader in an industry that may be classified as a commodity business or a highly competitive business? Let's try to find some answers by looking at GEICO, Wal-Mart, and other cutthroat commodity businesses.

Insurance Is a Commodity Business Like Retailing

Wal-Mart clearly dominates the discount retail industry. It is so far ahead of its competition that it is difficult to tell who is second. Kmart and Sears together are under one corporate umbrella known as Sears Holdings, considered to be Wal-Mart's main competitor. Wal-Mart's annual revenues are about $400 billion, whereas Sears Holdings' annual revenues are about $50 billion, only one-eighth of Wal-Mart's. But it was not always that way. Both Kmart and Wal-Mart were major retailers until Wal-Mart pulled into the lead and eventually won the race. ...