Over the last year, the Brambles Limited (ASX: BXB) share price has dropped 25% as its largest segment (CHEP USA) has faced a competitive trading environment in the US.
Competition has come from its pallet pooling rival, PECO (which paints its pallets red, whilst CHEP pallets are blue) and independent, non-pooled "white wood" / non-painted operators. The cost of whitewood has been decreasing which makes it difficult for CHEP to convince customers to use its pooling solutions. This has led to market concerns over the sustainability of pallet growth for CHEP.
Investors are also faced with uncertainty over the impact that the rise of e-commerce & Amazon will have on Brambles. The fear is that instead of most goods being shifted around on pallets for delivery to stores, the logistics sector will increasingly see smaller parcels being loaded into postal vans and dropped off at houses and apartments to online buyers.
Moat
Despite all these concerns, Brambles remains a quality business that can compete for a very long time. Warren Buffett popularised the term "economic moat", which refers to a business' ability to maintain its competitive advantages to protect its long-term profits and market share from competing firms.
The following are indicators that Brambles could have a wide economic moat:
- Its global operations provide it with economies of scale and cost advantages.
- It has an extensive and established supply chain network which locks in customers, particularly major retailers.
- It operates in many emerging markets where it has a first mover advantage and competition is low.
Foolish takeaway
Concerns over the impact of Amazon on Brambles appear to have been priced in and now could be a good time for investors to have a closer look at this blue-chip share.
