Pricing power has always been an important concept in valuing companies and something we take very seriously. It is a good measure of a company’s brand value and a strong measure of its “value” to the consumers of its product or service.
One of the reasons we have de-emphasized the ownership of commodity-based companies is that these types of companies are ‘price takers’ in that the price of the good they sell is set in large and often global marketplaces with very little product differentiation. There are times where a demand or supply shock can create abnormally high or small profit margins, but the price tends toward marginal cost-over time. So size, scale, efficiency, and resource location specifics are important characteristics to consider. That having been said, the price trend of these commodity companies – particularly energy – has remained well below marginal cost for the better part of 5 years and has been subsidized via shareholder losses. OPEC’s dismissal of Biden’s exhortations to the Saudis to increase production, and North American producers focusing on value over volume, are interesting data points and point to the fact that poor returns to the owners of resources in the past have consequences for the future. We shall see.
McDonalds is an interesting study in pricing power in that they have increased price to offset wage and input costs, but they also continue to push efficiency by way of technology to replace labour. Mobile order, self check in and out, are working very well and in fact the size of each order in terms of dollar amount (average ticket) is up since introducing these techniques. We expect they will soon be moving more toward automated cooking and food preparation in the future as well. Investment, not just price has been the key for McDonalds being a dominant player in the QSR market.
Disney has done several interesting things. Specifically, they have raised entrance prices at the parks, they sell preferred access times at premium prices, all enjoyed and utilized by a growing number of guests who value the convenience, and the continued investment in delightful attractions and intellectual property. But what really excites us is what they will do with Virtual Reality down the road. Forget Meta watch Disney. We were remarking recently, in a morning investment meeting, the potential for additional revenue streams as this technology progresses. Imagine that most visitors take their kids to a Disney Park once. It was certainly one and done for me! But imagine if for $25 your child (or you!) could go to the park virtually in your home to experience the Battle Star flight deck and engage in a chase of Darth Vader in some type of virtual experience. That is a massive additional opportunity. About 155 million people visit a Disney Park every year. Imagine if they were to increase visitors not by selling more attendance but rather with virtual tours and rides, maybe even experienced in those antiquated theatres! Investors are presently fixated on subscribers for Disney+ and not remembering what Disney is. A massive owner of intellectual property with massive pricing power and optionality unlimited. That’s why we own the company.
The company has massive pricing power in its movie business because it made the investments in Bamtech in 2015 that allowed it to bypass the theaters. The theaters are the ones who have increased price to the point that most would prefer to make popcorn in the comfort of their own home. That is a lack of pricing power meeting tech disruption.
In summary, we try very hard to invest in companies that have strong pricing power. The source of that power is multi faceted. It comes from strong intellectual property, created by large research and development spending, powered by visionary and strong management teams that balance the short and long-term dynamics, that serve large addressable markets, that while they may evolve, serve important and enduring touch points for humanity globally. Family entertainment is a massive business and Disney is the best at entertainment. Disney is a huge winner as new technologies evolve to allow for more immersive entertainment. We cannot wait to see what they create next.