Haynes Publishing – Economic franchises?

PUBLISHED: 20 Nov 2018 @ 14:31 | Comments (0) |

Warren Buffett stated (1991 letter) that a business with an economic franchise exhibited the following: (a) a product or service needed or desired (b) is thought by customers to have no close substitutes available (c) not price regulated.

I see Haynes (LSE:HYNS) as serving three distinct markets. It draws on many common assets controlled from the centre, such as the automobile database and the brand, but the customers served in each of the three markets are different. The three markets are:

Automotive manuals (mostly paper, but increasingly digital)
Practical lifestyle books
HaynesPro for professional mechanics and their suppliers such as parts distributors.

I’ll discuss the strength of each franchise – if there is one – in turn. Today I’ll cover Automotive and Practical Lifestyle with HaynesPro left until the next newsletter.

Automotive

A decade ago this business was earning £7.1m pa or 30p per share because it seemed to have virtual monopoly positions in a few countries with its iconic and trusted brands, such as Haynes, Clymer and Chilton, and unrivalled databases for repair and maintenance of vehicles.

We might have concluded back then that it had durable pricing power with a high mind-share of consumers and barriers to entry. It had a product that was needed with no close substitutes and with no government regulation of prices. It had demonstrated an economic franchise with high rates of return on capital for decades.

Two things destroyed that franchise in the mass market: firstly, free internet information on repair and maintenance; second, the move away from DIY toward hiring garage mechanics as vehicles became more complex.

The profit/loss performances of automotive manuals in the UK, USA and Australia clearly indicate that the franchise has disappeared in the traditional sphere.

That leads on to two questions:

(a) Forget economic franchise, but can the automotive manual segment become at least “a business”? Buffett describes what he means by “a business” in his 1991 letter:

“’a business’ earns exceptional profits only if it is the low-cost operator or if supply of its product or service is tight. Tightness in supply usually does not last long. With superior management, a company may maintain its status as a low-cost operator for a much longer time, but even then unceasingly faces the possibility of

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