When buying high quality companies, we want them to have growing moats so that they can fend off existing or future competitors. The distribution moat, which can be categorized as an intangible asset, is one moat that goes relatively unrecognized.

A strong distribution allows a business to reach its customers effectively and efficiently.

There are two forms of distribution channels:

-company distributes its product/service directly to the end customers

-the company distributes its products/services to the end customer indirectly(eg. through distributors, wholesalers or retailers)

Each of these forms have their own pros and cons, which include:

-speed to market

-resources and capital requirements

-profitability

-quality control

-extent of risks taken up

-impact on working capital cycle

Lets take a look at the direct distribution networks by looking at two examples:

1.Apple

-Apple owns and runs its own retail stores across the globe. This requires major resource and capital requirements from Apple

-This however allows Apple to have direct control over quality control and the customer experience. This allows Apple to build a good relationship with it customers, which allows Apple to charge a premium for its products. ( Apples brand also plays a role in its pricing power)

-Coca-Cola is an example of a business that has a wide distribution network. Coca- Cola products can reach the most remote places in over 200 countries.

-Coke is able to acquire good brands and distribute the products to a wider market, due to their strong and wide distribution network. Even if a product could be as good as Coca-Cola's, it would not be able to compete as the competitor would find it difficult to achieve the same scale in distribution network as Coca-Cola

Let's look at a company using the distribution moat playbook: StoneCo

-StoneCo provides fintech solutions in Brazil. It offers small and medium businesses :

i. payment and acquiring services

ii. banking services

iii. credit solutions

-StoneCo has a go to market approach. They set up local operations called Stone Hubs all across Brazil. This allows StoneCo to develop close relationships with their clients allowing them to have a massive distribution network moat

-StoneCo has started acquiring/ developing new solutions. They then sell these solutions to their already existing clients effectively and efficiently. This has lead to StoneCo's recording massive revenue and net profit growth

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