Thread by @_KarateBoy_

Quality is in vogue, & I have some thoughts on industry structure. How often have you heard:
“This is a rational industry with an oligopolistic structure”
Or
“The industry is fragmented, leaving potential for share gain.

So consolidate = good
&
Fragmented = good

Strange, no?

How can both be true?

Further, occasionally, you hear companies blame irrational competitors. And the inference is more conpetitors = more competition = bad.

So it seems like all industry structures can be framed in a positive light until they aren’t.

Let’s look at a few example:

Industrial gas is an oligopoly and a generally agreed upon good business/industry.

The banana oligopoly is pretty shitty.

In CPG, the big brand had value due to their scale/industry structure, but now it’s a weakness.

In distribution, some fragmented industries grow faster at highe margins than consolidated industries.

Furthermore, sometimes consolidation is a result of need for scale/purchasing power/synergies/etc...just to stay in place due to other factors.

Again, analysts can put a positive spin on industry structure regardless of what it is. It often seems to be just one sentence truism.

So let’s look at a hypothetical:
Company 1: 50% market share
Co 2: 2%
3-48: 1%

Will the industry structure drive returns and growth here?

Point is all companies are in the same industry structure but returns are going to be driven by your position within the industry. I don’t think this is appreciated.

Said differently, industry structure commentary tends to be a statement of market shares outside the target co.

Most important, have you ever looked at an analysis of market structure vs. stock market returns?

What’s the best? Why? Think about it before looking at my next tweet.

My preliminary conclusion is that either you’re (essentially) a monopoly or you’re not.

I don’t believe that hearing aid OEMs or industrial gas is a good biz bc of industry structure but bc they have long-term growth and other sources of competitive advantage.

The other clear conclusion is that the scale player in a fragmented industry hold the advantage. But that’s a statement about position/scale and not industry structure. See $FAST, $AOS etc...

Sometimes industry structure is an outcome. Semi companies need billions in R&D so industry can’t support 20 guys per product (memory, processing, etc...)

You see this in Med Tech. Often composed of 2-4 players per product. So structure is output of analysis, not input.

Summary: Your thesis shouldn’t depend on industry structure. It doesn’t seem to mean/drive outcomes the way investors think it does.

/rant

I’m drunk, overseas, in a food coma, and sleep deprived.

Also, apologies for the typos. I really wish twitter would allow a quick edit button.