Learning from Local Business

by JT McGee

Investors who want to know more about business would be wise to learn from local businesses.

Here’s the curious case of two businesses in my local area, from which anyone can learn a lot about the basics of value investing.

Car Dealers

There is no more competitive business than the car business. Any city has a boatload of car dealers – it’s just how a highly-competitive business works. But what’s different about my area is that I live on a state line. And state lines bring inconsistencies.

There are no fewer than 10 car dealership across the state line. They’re packed in tight around the highway that leads across the border. You’d think these businesses had a death wish. Why would separate owners all decide to pack so closely to one another while selling the same product?

Because there is no shortage of buyers.

It’s illegal to sell cars on Sunday where I live. Across the border, you can buy a car any day of the week. This presents so many advantages it isn’t even funny:

  1. Lower overhead – There are tons of fixed costs in car sales. Inventory financing costs, property taxes, and countless more. Dealers on the Sunday friendly side of the state line get way more bang for their buck as they are open for business 16% more days than dealers on the other side.
  2. Better advertising – This advantage is weakening, but it still exists – classified ads come out each Sunday. Classifieds are loaded with cars. If you’re an eager car buyer – like most buyers – you rush straight to the lot to buy a car you cannot afford. That’s good news for the only dealers that are actually open on the day you fall for an impulsive car purchase.
  3. Faster capital turns – Moving inventory is the name of the game. Dealers that can sell cars 7 days a week are sure to turn their inventory faster than dealers open 6 days a week. The faster you move inventory, the more productive your investment capital. And returns on investment capital are, in the long run, the only thing that really matters.
  4. Sales tax – It’s 1% lower over the border. On a $20,000 car, that’s a $200 savings you don’t have to negotiate for.

This is a classic business beloved by value investors – a business that has a material edge over the competition that likely won’t go away any time soon. And, because these dealers have been in business so long, costs incurred years ago (say…to purchase the land necessary to build out a dealership) insulate existing dealers from competitors.

Fireworks

Another curious case of legality! A fireworks store is situated right on a major thoroughfare right on the state line. (Measured with Google Earth, it’s roughly 500 feet away from the invisible dividing line.) It’s the first firework store you run into for miles upon miles when you exit one state for another.

The fireworks they sell are legal on one side of the line, and illegal to use on the other. You don’t have to be very bright to see how this particular company has a huge advantage.

Also working in their favor is customer ignorance – no one knows which states’ laws they’re hoping to avoid. So people from both sides flock to the store thinking that they have the “better stuff” that can’t be sold on the other side. I find it hilarious.

Again, this business is never going under. Ever. Unless someone throws up a $100 million bridge and builds out a new highway, this place will be packed every single year.

{ 1 comment… read it below or add one }

Darwin's Money September 5, 2012 at 21:23

Car dealers are so damn skeevy; they prey on women, minorities and people that aren’t experienced negotiators. I don’t know if it’s fair to say, but it’s not a competitive environment from a retailer/consumer standpoint; they seem to enjoy some arbitrage that doesn’t exist in most working markets.

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