Change is nothing new



​Businesses such as Amazon and Google are challenging more than just the digital landscape, but is this simply the latest evolution of disruption in markets? Here, European equities manager Simon Rowe looks at the impact of disruption in the internet era – and discusses why some industries might prove more resilient than others.


When Amazon recently announced it was buying PillPack, a US pharmaceutical distributor, for close to US$1bn, more than US$10bn was wiped from the market value of other pharmaceutical distributors and retailers, such as McKesson and Walgreen Boots, on the same day. This reaction was another sobering reminder of the power of disruption – in this case fear of future disruption. When Amazon bought Whole Foods in 2017, the shares of competing US supermarkets also swooned in anticipation of Amazon’s likely entry into online food retailing. Disruption has already killed off longstanding parts of the retail industry, but also many other previously solid businesses such as Kodak and Encyclopedia Britannica. Disrupters are everywhere. Apart from Amazon in retailing, look at Ryanair in low-cost flights, Google in search and advertising, Airbnb in accommodation and Uber in car transport. What are the implications for investors?

The obvious response is to try to spot disrupters and avoid targets. However while some successful disrupters have been huge stock market successes, some would-be disrupters are flops. Rocket Internet, a German portfolio of disrupters, has disappointed; and Pets at Home in the UK has slipped sharply since its initial public offering (IPO). Also, disruption is not really new as a concept. Disruption is just a modish term for a new product or service: you could say that the car disrupted the horse. But digital technology enables faster change because the internet is a cheap platform to promote challengers – and it also helps in the distribution of new products. Think of the rise of craft drinks or new shaving brands and products, particularly in the US. However, it is not always possible to invest in the most attractive disrupters because many, such as Airbnb or Uber, are kept private for years. So some of these companies are not available for general investment, or when they arrive on the market, governance may be poor or valuations already very high.

Apart from spotting disrupters, as an active investor we also have the freedom to avoid businesses that might be vulnerable to disruption – even if that threat is not especially obvious today. Retailing is famously exposed to disruption from online shopping, but we have also avoided many other areas, such as distribution, where increased price transparency brings greater pressure on the business. We also steered clear of what looked like attractively priced satellite businesses such as Eutelsat, due to fears that the bundled pay-TV distribution model would be disrupted by internet viewing sites – such as Netflix.

Instead we have chosen to invest in sensibly valued companies that we believe will be resilient to disruption. These companies tend to make products with distinct technical characteristics that are sold by a proprietary sales force, rather than on price over the internet. For example, niche industrial products such as vacuum pumps, or the sealing and bonding products of Swiss speciality chemicals company Sika, or the specialist oils and greases of Fuchs in Germany. For a long time we were invested in German optical retailer Fielmann, not least because selling prescription spectacles over the internet is complicated by the need for measuring and fitting (there are a few companies now trying this).

More recently we have started to invest in Ströer, an outdoor advertising specialist that dominates the German market with JC Decaux. Outdoor advertising actually benefits from disruption elsewhere in the industry: it is a relatively cheap alternative to the increasing power of Google, and it is a credible alternative to old media such as newspapers and TV for mass marketing. In addition, new digital billboards make it possible to sell the same space many times over, generating more sales for the same space and reducing costs – no need to send out a team to stick up new adverts with a bucket of glue.

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