There are no businesses with MOATs that last forever. That is a flawed belief. What businesses have are MOATs that delay the inevitable. In the rapidly advancing world, this realization becomes even more important as companies struggle to keep up with customer demands and end up losing their value.
"Value Migration" by Adrian J. Slywotzky went in-depth into this phenomenon and termed it Value Migration. A strong mental model can help you find the next multi-bagger (Raamdeo Agrawal of Motilal Oswal attributes finding Heromotorcorp to this phenomenon).
This blog will delve into this concept and explore the current value migration trends that we are witnessing. Understanding these trends cannot only help us adapt but also potentially benefit from the changing business landscape.
What is Value Migration?
At its core, value migration happens when economic value moves away from an existing company or industry to another that better suits the evolving customer needs and demands of customers. It has three phases:
Value Inflow: When companies or industries begin capturing value due to innovation, technological adaptation, regulatory changes or better business models.
Value Stability: When companies maintain their market share and consistently meet customer needs./
Value Outflow: When companies lose market share and value due to an inability to adapt, thus ceding ground to more innovative players.
Lets make it easier by visualising it. Think of value migration like a wave that keeps flowing somewhere or the other. In order to make money, businesses need to keep track of it and keep following it until they can not. The value migration signifies consumer trends and the companies chasing it signify innovations and changes required to meet the evolving demand.
It will get harder to deny this observation as we get into the examples. Value Migration is dynamic, eternal and inevitable.
What causes Value Migration?
Technological Disruption:
The rapid advancement of technologies such as AI, cloud computing, and automation enables companies to create new value. Traditional businesses, slow to adopt these changes, see value moving to more tech-savvy firms. We will get into the details of how all the FAANG giants became 'giants' due to their ability to suck the value migration like a black hole and not let go.
Shifting Customer Preferences:
As consumer demands evolve, companies that fail to meet these new expectations will lose value. For instance, companies that offer greater personalization, convenience, or sustainability are increasingly capturing market share.
Business Model Innovation:
Companies with innovative business models, such as subscription-based services, direct-to-consumer approaches, or marketplace platforms, are capable of capturing value from traditional business structures.
A prominent example is Dell’s direct-sales model, which disrupted traditional PC manufacturers that relied on third-party retail channels.
Regulatory and Market Shifts:
Globalization and regulatory changes can also cause value migration. Think of RERA as an enabler of the migration trend from unorganised to organised real estate developers.
Lets look at past examples
FAANG: Lets look at the top companies first to assess the idea of value migration and then look at value migration in India.
Facebook captured immense value that migrated from traditional media outlets and advertising platforms like print, radio, and TV. As consumers shifted their attention to social media, Facebook became a dominant player in digital advertising.
Amazon is one of the biggest examples of value migration. The company disrupted traditional retail by offering a vast selection of products online, with fast delivery and customer-centric services. Value migrated from traditional brick-and-mortar retailers like Walmart, as customers preferred the convenience and pricing offered by Amazon’s platform.
Apple captured value from multiple industries, including personal computing, music, and mobile phones. It disrupted incumbents like Sony (in music players), Nokia (in mobile phones), and Microsoft (in personal computing) with its integrated ecosystem of hardware, software, and services. With the advent of smartphones, the value of traditonal cameras, flip phones, telephones, music playets etc shifted to a single deivce and that is why it created enormous value.
Netflix is a textbook example of value migration from traditional media and entertainment companies like Blockbuster, cable TV, and cinema chains. Netflix disrupted the DVD rental market by offering a subscription-based, streaming model. As consumer preferences shifted to on-demand entertainment, Netflix captured enormous value, becoming the dominant player in the streaming industry.
Like Facebook, Google captured significant value from the traditional advertising industry. Its search engine became a gateway for billions of users, and the introduction of Google AdWords revolutionized digital advertising by offering highly targeted and measurable ad campaigns. Google’s Android operating system also migrated value from traditional mobile phone software companies like BlackBerry and Windows Mobile. Android became the dominant mobile OS globally, capturing value from hardware manufacturers and building a strong ecosystem around its services
Lets look at Indian companies as examples now.
Private banks: Post the arrival of private banks, they have been able to succesfully eat away the share of public sector bank and will continue doing so. The efficency, technological gap, underwriting skills and the add on features and services allowed private banks to capture the customers of public banks and retain them well.
Zomato: Zomato has performed brilliantly for the past few years. Its share prices has jumped from lows of 45 in Jan 2023 to 283 currently. Zomato has been successful due to their ability to capture value from eating out, unorganised delivery systems, eating at home and now are currently on their way to capture value from companies like Dmart and Big Bazaar in the form of Blinkit.
Indian tech companies: Companies like infosys and TCS have been great value creators of the past (especially the 2000s era.) The reason they have been so successful is because of their ability to capture value from the global market owing to the cheap labour costs. This allowed them to deliver the same product or better at a much cheaper rate.
Discount brokers: Zerodha, Angel, Groww etc have had an exponential growth in the last decade and are looking to maintain their growth in the future as well. Discount brokers changed the whole broking industry as they captured value from the traditional brokers due to the expensive brokerage costs and inefficient technology.
HeroMotocorp: Earlier, I had mentioned that Raamdeo Agarwal attributed his success of Hero Motorocorp to the concept of value migration. So what was the value migration? He witnessed a shift in the changing demands of consumer from scooters to bikes. This allowed him to bet on Heromotocorp and make a killing.
I hope it has become clear the Value Migration is a very strong phenomena and we must try to understand where the value is going. Lets now look at current value migration trends which can help us find companies worth investing and then some trends of the future which can shift the landscape of their respective industries.
Current value migration trends
Organised vs unorganised: As the Indian economy gets formalised, we are witnessing organised players stealing market share from unorganised players in several industries. For example, the most successful bet of the late legendary Rakesh Jhunjhunwala was Titan, essentially a bet on organised players winning the jewellery segment by providing better service and 100% authentic real 24k gold. It worked very well, and this trend is still going on. Currently, the organised segment owns 40% or so of the market share, which is set to increase to 60% in the next few years. Businesses like Senco Gold and Kalyan Jewellers have done well owing to this trend. Some other examples include real estate, where the organised players are taking market share away due to RERA, which makes business for unorganised players difficult, and the fact that organised players can provide better-end products and trust. In a sector I recently covered, the PEB industry is also witnessing a shift from unorganised to organised. Organisations are better equipped to do more oversized products, better efficient time management and better compliance management.
Savings vs equities: Do you know why Banks have not peformed well in the past few years? one of the reasons is that the deposit growth has been abysmal and that is partly because the money is flowing into equities. Equities and other assets offer better returns and hence the value is migrating from deposits to AUM of Mutual funds and Wealth managers and we all know the value they have created in the past few years.
Planes vs railways: The air traffic does not even come close to the traffic railways have and that might be the case in the near future as well. However, with the increase of airports, planes and disposable income ; the amount of people travelling from planes have increased significantly as it has multiple value propositions such as time saved and comfort. Hence, there is a value migration trend in the form of the advantages mentioned above which is allowing companies like Indigo to fly high.
Traditional assets vs Equities: Again, Equities as an asset class is beating most of the other assets in terms of investment growth. People recognise the value of equities and the returns it can provide which is leading to a value migration of investments in fixed assets such as land and gold to stocks and bonds.
Renewables: With India's growing energy and power needs, companies need to find energy sources. Renewables are being invested heavily on due to the value proposition in terms of no pollution and basically infinite energy source. Although, history has been proof that with a new source of energy; the older ones demand has still stayed the same, that does not mean value will not migrate from traditional sources of energy to the new ones. What I mean to say is, if Oil was to fulfill 10x of the energy needs, it might do 8x of it as the 2x might go to solar or wind energy.
Traditional offices vs flex working spaces: Another shift that is emerging is that flex working spaces are being preferred over traditional offices. The advantages of flex working are too hard to be ignored that a value migration does not take place. The capex costs go away, the admin costs go away, the hassle of maintaining the office goes away and all of that for a fixed cost per month. This value migration is the reason why the industry is set to grow at 20%+ CAGR plus.
Smart meters: Traditional analog meters only provide a basic record of electricity usage, often with delayed data. Smart meters, on the other hand, provide real-time usage information and allow consumers to adjust their energy consumption habits to lower costs. This value migration is also driven by regulatory mandates for better energy management and sustainability. Smart meters allow energy providers to monitor grid performance in real-time, reduce energy theft, and improve customer service. This technology helps them optimize energy distribution and reduce operational costs.
These are some of the emerging and currenly on going value migration trends in the Indian landscape.If spotted right and early, you can make a lot of money. Let's discuss some mega value migration trends that are taking place in the world and end our blog with something to think about.
AI: AI is one of the most significant innovations in the world. It is hard to comprehend the number of sectors from which it might snatch the value. To begin with, it is competing against search engines, and if that succeeds, there is already a big pool of value to be captured. Moreover, AI can take the value away from relatively mechanical and less complex jobs such as driving, basic coding, etc. It can also take away the value from creative fields such as music artists, painters, video editors, content creators, marketing jobs, etc. My answer to this is limited to my imagination. Again, We can not comprehend the value migration that can take place in the future.
EVs and autonomous driving: EVs are a trend already present in many companies and have many value propositions, such as no pollution, no fuel costs, etc. However, when the EVs improve regarding range and costs, we can expect a big value migration trend. Autonomous driving is a trend I have already experienced, and it can take a lot of value away. For example, it can take the value sway from Uber, drivers, taxi services, food delivery, amazon delivery, truck drivers, etc.
AR/VR: Augmented reality, such as Meta's latest product, can disrupt the consumer space and devalue smartphones, tablets, and other personal devices. This, too, possesses huge potential.
There are many other trends that we can talk about such as Neuralink, CRISPR, space exloration etc but I will let your imagination run wild with it. I hope this blog was helpful and was able to engrain the concept of Value migration which is an eternal phenomenon and should definitely be considered while investing.
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