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Investing history has it that Warren Buffet popularised the usage of the word “moat” to simplify or explain the idea of a company’s competitive advantage. The width or impregnability of the moat is what makes businesses more durable.

And in today’s investing literature, “moat” is almost de rigueur. Every broker, analyst or their cousin trying to push their favourite stock, uses the word. No matter if the supposed moat is simply a puddle.

Despite the over-usage, the “moat” remains an apt metaphor. It is what prevents competitors from eating your market or business, just as the moats around castles prevented the enemy from entering.

One of the most enduring moats in investment thinking has been that of incumbent FMCG businesses – think Unilever, P&G, Nestle and such-like. These companies built moats around scale, brands and distribution.

The scale allowed for large advertising budgets that helped boost brands, and distribution clout made it extremely difficult for new entrants. Goods don’t simply appear on shelves; they have to be put there. In a geographically large market like India, with around 15 million kirana stores, getting your product on the shelf involves some serious legwork.

New brands have to literally trudge to each shop and convince the shopkeeper not just to stock the product, but also keep it in plain sight. Given how crowded these stores are, that’s a huge privilege. If your brand is not well-known or heavily advertised, the kirana owner will typically refuse to stock the product – or will demand a huge profit margin.

And if you do manage to convince him or her to stock your product, the logistics of warehousing and transporting your product to random places like Ichalkaranji or Igatpuri are daunting.

Building physical distribution requires not just money, but lots of time (decades!). Incumbent companies like Nestle and Hindustan Unilever, as well as the homegrown Marico, Dabur and Parle among others, therefore have significant and enduring moats. RoCEs of such companies are invariably among the highest, and some like Nestle have triple digit RoCE!

This is (and has been) reflected in the elevated valuations assigned to these stocks by Indian markets. Most of these stocks quote at P/E multiples greater than 50, and in times of euphoria – much, much higher.

And this is despite the fact that growth for the last decade has been in single digits for a majority of these companies.

But is this moat now under threat?

In the US and other advanced economies, the moat grew shallower thanks to big-box retail. Large chains like Walmart made it easier for newer brands to reach locations across the country. This is yet to happen in India, and even these outlets have limited shelf space.

The game-changer is e-commerce. Suddenly, small brands can not only stock their products, they can spend on limited and targeted advertising (no need to buy expensive national TV ads), and best of all, the e-commerce company will undertake to deliver your product to practically any pin code in India.

Little wonder that hundreds (nay, thousands) of new D2C brands entered the market. And backing them were deep-pocketed VCs, who encouraged them to spend heavily on customer acquisition. Several years later, the jury is still out. Many of the hyped up D2C brands are struggling to survive, as they’ve been unable to build brand loyalty or recurring sales without heavy discounting. Still others are trying to build a brick-and-mortar presence.

But quite a few have built decent businesses. The best evidence of this is the rich valuations paid by Unilever (Minimalist) and ITC (Yogabar, Mother Sparsh), Emami (Man Company), Marico (True Elements, Beardo), etc. for acquisitions of D2C brands.

Honasa Consumer (Mamaearth) has listed, and just 10 years after being founded, boasts revenues of > ₹2000 crores. This simply could not have happened twenty-five years ago.

These examples are only those that have become visible – the tip of the iceberg! There are plenty more that are quietly (or loudly) jumping across moats. The best evidence of that is my Gen-Z daughter, who uses only brands that did not exist fifteen years ago.

This is not to say that the FMCG giants will fall over. They have formidable skills and brands; and substantial cash to acquire upstarts. However, they now have to share the profit pool with many others. And the onslaught shows no signs of slowing down – and what with e-comm and q-comm, and various other comm… suddenly, the moat seems less daunting.

Maybe it’s time for a re-look at valuations. What do you think?

I am not a registered research analyst or advisor. The above article should not be construed as investment advice or recommendation, but is merely for the purpose of debate and discussion. You should assume that I’m biased and may have a position in any of the stocks mentioned in the article.