Moat

What it is

The concept was introduced by Warren Buffett, an analogy to the castle moat that protects the castle (business) from attackers (competition).

Most common sources of moat:

• →Switching costs: high costs of switching to a competitor
• →Network effects: the more users, the more valuable the product
• →Intangible assets (brand), strong brand, patents, licenses
• →Cost advantages: structurally lower costs (scalability)
• →Efficient scale: natural monopoly in a given area

Moat is measured by width (how strong?) and durability (how long will it last?).

Brand as a moat source: A strong brand allows charging a premium for a comparable product (see pricing power) and reduces customer acquisition costs, people actively seek the brand rather than needing expensive selling. Brand strength can be measured indirectly: premium price vs. the generic equivalent, repeat purchase rate without discount incentive, and how long a position holds even after a cheaper competitor enters. Brand is the most vulnerable form of moat, unlike switching costs or network effects with structural/mechanical protection, reputation can be damaged by a single scandal or series of quality failures.

Why track it

A company without a moat is threatened by profit erosion, once competitors spot it, they will arrive and compress margins. A company with a deep moat can sustain above-average ROIC for decades.

When analyzing, look for concrete evidence of moat: ability to raise prices without losing customers (pricing power), low churn, ROIC consistently above WACC.

Real-world example