29 Oct The Economics of Lor Mee
I grew up in the Old Airport area and the Food Centre was known to be a food haven. Pareto principle suggests that a few stalls will get majority of the customers. True enough, there is a legendary Lor Mee stall at Old Airport Food Centre called Xin Mei Xiang (XMX, 新美香), which has a perpetual queue during the peak hours.
I couldn’t remember when was the first time I had a taste of this Lor Mee but I love it even now. (To our foreign readers, Lor Mee is a starchy noodle dish that is popular in Singapore and Malaysia.)
XMX is believed to have competitive advantage and a strong economic moat because it is extremely difficult to replicate the food standard and brand name it has built over the years.
I would also believe the earnings of XMX is rising year-on-year or at least it appears to be. We all believe our perception is reality. Given a record of twenty to thirty years of good earnings, XMX would command a high stock price if it is listed. And many investors would clamour to buy the stocks as nothing could go wrong and they understand Lor Mee well enough. The gut could also confirm it is a wise investment.
All is good until I discovered a competing Lor Mee stall at Old Airport Food Centre early this year. This is not the first time Lor Mee stalls are competing in the Food Centre. But what is remarkable about this stall called Xiang Ji (XJ), produces Lor Mee with the same taste as XMX! This fact has bewildered many patrons and no one really knew how XJ had the recipe, especially the XJ owners are from China cooking a Singaporean/Malaysian dish!
XJ has eaten into XMX’s market share increasingly as more people know about the former. Based on a very small sample size (my recent breakfast trip), XJ has a queue longer than XMX’s.
One of the reasons is because XJ is cheaper. With $3 you can get fish in your Lor Mee at XJ while the equivalent will cost you $4 at XMX.
The magic of XMX disappeared and the competitive advantage eroded. This incident is analogous to the effect of globalisation in a bigger scale. The Chinese can imitate very well, almost the same quality as your product, and charge at a price lower than yours. If you think that you are formidable and can afford to rest of your laurels, you are in for a good shock sooner or later.
Here are some of the learning points I have gathered:
- It is very difficult to assess the durability of competitive advantage and economic moats. They seem to have a lifespan and it is very risky to invest in a stock believing the business will grow and not fail. Competitive advantage is an overused term just because Warren Buffett made his wealth that way. Please, not everyone can be Warren Buffett.
- There is an overconfidence bias that we can accurately estimate the durability of competitive advantage.
- Economic moat is susceptible to black swans. Because the earnings are consistently growing, it is easy to identify the prospect of the company. If it is obvious to you, it is obvious to everybody. There will be strong aggregate expectation for the competitive advantage to last but a negative event will also crush that expectation rapidly. XJ’s Lor Mee replica is a black swan event for XMX and the patrons (including me).
- If you are in business, do not rest on your laurels. Keep improving or adapt. Do not be complacent even if you are ahead.
On a side note, I read that Dr Leslie Tay had an average review of XMX. Wonder what will he say if he has tried XJ?