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Are ‘moats’ worth anything any more?

An economic moat is the concept of a business having a competitive advantage that other businesses would find hard to replicate or get on in the sector.

For example, one of the most common moats is brand power. Colgate, Head & Shoulders, Dulux (from DuluxGroup Limited (ASX: DLX) and Vegemite are all instantly-recognisable brands. If you ask someone to pick a toothpaste and paint tin they’re quite likely to choose Colgate and Dulux.

When you have that much consumer power you can increase prices at rates faster than inflation. Some of these brands are now significantly more expensive than generics offered by businesses like Aldi and Amazon, which are now benefiting from showing consumers how much cheaper their own-brand items are. Proctor & Gamble may not grow as much over the next decade as it has done over the past decade.

Elon Musk recently called moats lame. The important thing to remember with moats is that it isn’t just about a brand name. A name alone isn’t a huge deal, as much as Trump would like to say it is.

DuluxGroup would say that its products are of a higher quality for good value. Altium Limited (ASX: ALU) has a moat with how sticky its customer base is and how often it innovates its products.

REA Group Limited (ASX: REA) has a moat due to its market-leading status as the number one property site in Australia, which attracts the most buyers and sellers – creating a self-fulling circle. It is also frequently adding more features to the site, adding more value for sellers and buyers.

SKYCITY Entertainment Group Limited (ASX: SKC) has exclusive casino licences for many years in the locations that it operates. That isn’t just a moat to competitors, it’s an impenetrable barrier because no other casinos can be opened.

There are also other moats like how much people love Apple products, how Google is the only search engine most people use and Facebook has a stranglehold on the social media world.

Foolish takeaway

Some moats may be disrupted, but there are many other types of moats that should be able to keep on attracting customers over other competitors for a long time to come.

When I think of economic moats, one of these top stocks really springs to mind, which is why I’m happy to own it.

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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended REA Group Limited and Sky City Entertainment Group Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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