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The Company
by WealthEffect Staff
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Does the company have a competitive advantage?
 
  Is this advantage sustainable?  
  How certain can you be?  
 
1.

The section, Intro to Stocks, highlighted the importance of competitive advantage. For a company to be a potential investment, you should have confidence that it holds an edge over its competition. This edge could be a cost advantage and/or a quality advantage — something that allows it to prosper in an intensely competitive world.

Ray Kroc, the man behind the McDonald's empire, charmingly captured the reality of business success: "If I saw a competitior drowning," he said, "I'd put a live fire hose in his mouth." As they say in Silicon Valley, if you eat lunch, you are lunch. Business is tough: it's no secret that 95% of all new companies fail within two years. To succeed requires an edge.

 
 
2.

True success — the kind in which you want to invest — requires a company not only to show profits but also to grow profits, decade after decade. That kind of success requires a competitive advantage that can survive the test of time.
 
 
3.

How then, can you have confidence that a company has what it takes? Let's address this question through an example of a business that fits the bill: The Coca-Cola Company. Here is a company which has been successful in every decade of this century in every possible environment, selling an inexpensive, infinitely tested, wonderfully predictable, relatively safe product.

Steve Jobs of Apple Corporation might have lured John Sculley away from Pepsi by asking him if he wanted to change the world rather than just sell sugar water to kids. But, at Coca-Cola, they would take issue with that argument. For one thing, they are certainly changing the world, for better or worse. For another, they would likely argue that they are not in the business of selling beverages, but rather of satisfying needs. Hence, Coke's dedication to always having its product "within arm's reach of desire."

Don Keough, a former executive at Coca-Cola, once stated that the company was in the business of "creating and maintaining conditioned responses." Which is to say, Coke is as much an emotion as it is an actual product. This sugared water is a part of your childhood and your daily life. It's that special ballgame or that perfect Sunday afternoon. It's Mean Joe Greene tossing a towel to a little kid and it's a bunch of people on a mountain singing about apple trees and honey bees and buying the world a Coke. It is a small, sweet piece of the American Dream.

And it's about refreshment. Let's face it, the stuff tastes really good; more than that, it tastes really special — so much so that the company provoked an uproar when it introduced New Coke. Think about that: here is a company whose customers got upset when they tried to improve the product! Loyalty like that is built over a lifetime, and will last as long.

What's also amazing is that this quintessentially American company makes ¾ of its profits outside of the United States. Because it is such a part of popular culture here, it is particularly desirable to people everywhere. Coke is the single best example of "Affordable America." The company's growth opportunities overseas, where 95% of the population lives, are still attractive after all this time.

Add to these attributes the fact that, as the largest beverage company, Coca-Cola has the benefits of size, known as economies of scale. Production, distribution, and marketing expenses can be spread over larger amounts of volume, lowering average costs.

Warren Buffett, the legendary investor, suggests a question to consider when looking at a particular business: If you had as much money as you needed, could you compete successfully against this business? In the case of Coca-Cola, his answer is that he would have to give back the money and admit defeat.

This is one heckuva company.

To see the Production of Coca-Cola chart, click here.

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