Economic Franchise

Economic Franchise is an important concept of value investing. A well managed company in a commodity business may not be able to sustain its growth in the long run but an average company with economic franchise can be with good performance for a long period of time. This shows how important economic franchise to a company. There are three characteristics of economic franchise :

1. The product or service are highly needed by its customers.
2. Customers can not find a similar product or replacement easily.
3. Customers of the product or service are not too price concerned.

Companies with economic franchise are more likely to sustain their growth in the long run and their performances in the future are easier to be predicted. Economic franchise can be in different ways of appearances such as branding (Coca-Cola, WD-40), state protected market dominance (Petro China) or market dominance through market (Towngas in Hong Kong) etc.

Branding :
Coca-Cola is a well known brand in soft drinks market throughout the world. Its brand is so well established that even you have got its secret formula, you cannot establish an enterprise with similar performance as Coca-Cola. This is because its brand has been successfully promoted with a representation of modern, tasty and in line with the American/Western culture image.

State protected market dominance
Petroleum is a strategic industry in China and China government will only allow pre-approved enterprise to do business within this area. Petro China is the largest state owned enterprise allowed to do the oil business in China. They can easily dominate the China oil market and turn economic franchise into huge profits.

Market dominance through market
Towngas in Hong Kong has the market dominance in Hong Kong through its management excellence. As an important element in Chinese cooking behavior, towngas have outperform major competitions from petroleum gas and electricity through their well established supply network and excellent service. Their economic franchise is granted by the market ie customers.

In general, market dominance granted by the market is more likely to sustain than state protected as the market not government is the ultimate profit origin in a free market.