There are certainly gradations of moat width, and we here at Morningstar describe companies with milder competitive advantages as having "narrow" moats. From our point of view, far more companies have narrow moats than wide ones. Narrow-moat firms are, on average, of a much higher quality than no-moat companies. Generally, narrow-moat companies generate lower returns on invested capital than wide-moat companies but still have returns slightly above their cost of capital. (We will talk about return on invested capital and cost of capital extensively in coming lessons.) Narrow-moat companies typically come in two varieties:
Firms with Eroding Moats. These companies have competitive advantages, but they are eroding due to a shifting industry landscape. This scenario is faced by some of the consumer-products companies, like those we just examined. For example, we consider both General Mills GIS and Kellogg K to be narrow-moat firms. The pricing power they once enjoyed is eroding as a result of increased competition and an ever-consolidating retail landscape that is increasing buyer power. The Baby Bells, such as AT&T T and Verizon VZ, are another example; their economic moats are also slowly eroding. In future years, they won't enjoy the monopoly pricing power they once did because of the increased use of wireless phones and, of course, the Internet.
Firms with Structural Industry Challenges. A company in this category dominates its peers, but resides in an industry where wide moats are nearly impossible to create. For example, Waste Management WMI has a solid position in the waste services industry. The trash taker is the largest operator of landfills in the country, a position that is nearly impossible to replicate due to political and citizens' group opposition. Such barriers to entry in waste disposal are augmented by regional scale and route density on the collection side of its business, which makes life difficult for local independent haulers. This competitive position allows it to garner real pricing increases, which help to mitigate rising diesel fuel prices and cyclical declines in waste volume.
Wide Moats >>