Costing It Out: Why Companies with Low Production Costs have great edge.

Max Teh
Feb 9, 2024
3 min read

Updated: Jun 26

Table of Contents

What is Low Cost of Production?
Benefits of Investing in L.O.C.O.P Companies
How to identify companies with Low Cost of Production as one of their Economic Moats?

Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.

In the competitive world of business, every penny counts. That's why investors often gravitate towards companies with a low cost of production (LOCOP). These cost-efficient players not only survive, but thrive, offering potential for superior returns and long-term stability. Today, we'll delve into the benefits of investing in LOCOP companies, using Walmart and Inditex as powerful examples.

What is Low Cost of Production?

Simply put, LOCOP refers to a company's ability to produce goods or services at a significantly lower cost than its competitors. This efficiency can stem from various factors, like economies of scale, efficient supply chains, innovative production processes, and access to cheaper resources.

Benefits of Investing in L.O.C.O.P Companies:

Profitability and Margin Expansion: Lower production costs translate directly to higher profit margins, especially in high-volume industries. This profitability fuels reinvestment, growth, and shareholder value.
Pricing Power and Market Share: LOCOP companies can offer competitive prices, attracting customers and potentially gaining market share, even during economic downturns.
Resilience and Sustainability: Efficient operations make these companies less susceptible to external shocks like rising input costs, enabling them to weather industry fluctuations with greater ease.

Examples:

Walmart:

This retail giant exemplifies LOCOP through its vast economies of scale, efficient logistics network, and bargaining power with suppliers. These factors allow them to offer lower prices, attracting customers and solidifying their dominance in the retail space.

Inditex:

The owner of Zara and other fashion brands leverages its vertically integrated supply chain and efficient production processes to keep costs low. This enables them to offer trendy clothing at affordable prices, capturing a significant share of the fast-fashion market.

How to identify companies with Low Cost of Production as one of their Economic Moats?

You can use AI chatbots like Google Gemini or BingChat as a start,

simply start by using a prompt like

I am a long-term investor, who favors companies with Low Cost of Production as one of their economic moat. 

Do you know if Company A has that?

This should only help be the first step to help you get a broad stroke understanding at a high level, and should be followed through with a more thorough analysis through credible sources like the company's 10k filings and better understanding of the company's supply chain & production process to get a better understanding.

Another telltale sign when companies are reaching state of L.O.C.O.P is when their profitability ratios such as Gross, Operating & Profit Margins are on an increasing trend.

Remember:

LOCOP alone doesn't guarantee success. Look for companies with sustainable cost advantages, diversified product lines, and strong brand recognition to maximize your investment potential.

By understanding its value and identifying companies adept at managing production costs, you can make informed investment decisions and potentially outperform the market.