A basic discussion of business positioning inevitably asks the question of what market is a given product or service trying to target. One way to think about this is on a spectrum between low-cost leaders and highly differentiated companies. It is these low cost leaders that have had highly successful earnings reports during our market downturn. Walmart (WMT), Priceline (PCLN), and McDonalds (MCD) to name a few.

Low-cost leaders provide the cheapest option for a given market. Feeling poor? Go buy something off the dollar menu at McDonalds. In part, Walmart is successful at this model because of their size. They can force their costs below their competitors by displacing shrinkage onto the product manufacturers, fighting unionization, and being the all around most hard-core badass realists negotiators. If you want to buy anything from a new lawnmower, outdoor fire pit, groceries, prescriptions, or camping gear Americans KNOW that Walmart is the cheapest place to get it. But still not everyone shops at Walmart… Inefficient market? Public ignorance? Psychological disorder? Maybe a little of both.

In a world where a given company, lets say Target, knows it cannot out price Walmart on most of the things they sell, how can they possibly stay in business? The answer is the product or brand differentiation. Consumers need to believe that when they go shopping there they will be getting something extra that is worth the price. Maybe it is friendlier service, higher quality good, or employee benefits. This basic model creates something of a successful business horizon. This is what makes Target so interesting, they have, more or less, successfully navigated this thin range of being not the ultimate low cost leader but also not offering the most highly differentiated products. Think Walmart vs. Target vs. Crate and Barrel and it goes on from there.

Notice that the graph shifts so that a successful differentiated business requires more differentiation for the same cost.

Anyways this is a long way of saying that people put price tags on intangible things all the time. But when faced with a pinch, a lost job or declining home value, consumer’s willingness to pay for these extras goes down rapidly. Further, our perception of risk goes up dramatically. We think, as I have been often lately, “maybe I wont be able to get this job that pays $X a year”, and change our long-term consumption smoothing. As an investor how can we play on these tendencies? In the macro sense, some people push their money into gold for price stability. At least, I know that even if my retirement doesn’t grow, it certainly will stay liquid and maintain some value. Which is more then can be said for those poor GM workers who sunk their life savings into the stock. Individual savings has gone up as well, this speaks to the risk question.

We can look deeper into this. As mentioned above WMT, PCLN, MCD, BWLD, CMG all had significant beats. Consumers are already moving their purchasing power into the low cost leaders of the industry. No major industry is going to be wholly extinguished, rather the companies that offer substitute products and services and lower costs will thrive, and the highly differentiated ones will fail. The market for these differentiated goods is drying up, companies that rely heavily on brands, Abercrombie and Fitch (ANF), every American car manufacturer, Sirius/XP (SIRI) comes to mind. The obvious play is long on the low cost leaders and short on the highly differentiated companies. I would add to this by saying a quick look at the financial position of a given company will also help illuminate the strength of the company. A highly differentiated company with high levels of debt is fundamentally unsustainable in this economy. If the American standard of living is permanently set back and the average American has lost 20% of their personal value the entire spectrum has been shifted, and companies must adjust. Here is my list of potential low-cost leaders from my own life experience. Obviously do your own DD. GPS, KR, LUV, HMC, MCD, WMT, PCLN, VLO, or ALK.