The impact of competition on profits
Let me give you an example of what impact the competition has on company's profits. Following are the profits of two companies:
| Year | Profit 1 | Profit 2 |
|---|---|---|
| 1992 | 98.48 | 21.5 |
| 1993 | 127.27 | 33 |
| 1994 | 189.96 | 40.5 |
| 1995 | 239.22 | 53.2 |
| 1996 | 412.7 | 54.2 |
| 1997 | 580.25 | 74.3 |
| 1998 | 837.44 | 86.2 |
| 1999 | 1069.94 | 98.5 |
| 2000 | 1310.09 | 118.6 |
| 2001 | 1540.95 | 173.15 |
| 2002 | 1701.46 | 201.52 |
| CAGR(1992-2002) | 32.96% | 25.08% |
Now look at the results of these same companies after 2002:
The first company is none other than HUL and the second one is Nestle. Both of them started on the same footing in 1992 where HUL's profits were almost 4.5 times that of Nestle. Since there were no competition, HUL ran up very fast to achieve a ratio of almost 11(1310.09/118.6) in 2000, more than twice what it was in 1992. Then P&G and Colgate realized the potential of India becoming huge market, increased their penetration and threw HUL on the back foot. Look at the sluggish growth of HUL between 2002-2008. The FMCG market has grown phenomenally well over the last 6 years but HUL couldn't capture most of it since the competition went ahead of it. We can conclude that the profits of HUL between 1995-2002 were inflated because of no real competition from anybody. When you invest in a blue-chip, make sure it is facing tough competition otherwise your investment will go sour.
| Year | Profit 1 | Profit 2 |
|---|---|---|
| 2002 | 1701.46 | 201.52 |
| 2003 | 1771.79 | 263.08 |
| 2004 | 1208.4 | 251.92 |
| 2005 | 1408.1 | 309.57 |
| 2006 | 1890.53 | 315.1 |
| 2007 | 1914.88 | 413.81 |
| 2008 | 2117.18 | 534.08 |
| CAGR(1992-2002) | 3.71% | 17.64% |
The first company is none other than HUL and the second one is Nestle. Both of them started on the same footing in 1992 where HUL's profits were almost 4.5 times that of Nestle. Since there were no competition, HUL ran up very fast to achieve a ratio of almost 11(1310.09/118.6) in 2000, more than twice what it was in 1992. Then P&G and Colgate realized the potential of India becoming huge market, increased their penetration and threw HUL on the back foot. Look at the sluggish growth of HUL between 2002-2008. The FMCG market has grown phenomenally well over the last 6 years but HUL couldn't capture most of it since the competition went ahead of it. We can conclude that the profits of HUL between 1995-2002 were inflated because of no real competition from anybody. When you invest in a blue-chip, make sure it is facing tough competition otherwise your investment will go sour.
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