Over the past several years, a small green gecko has become the nation's most popular reptile; if you are at all interested in the business fundamentals that made him famous, read on.
GEICO, a subsidiary of Berkshire Hathaway
State Farm, Allstate
GEICO's model allows the customer to call the company direct, bypass the agent, and usually get a lower rate. So if this business model is clearly cheaper, and more competitive, then why aren't others following suit?
Well, State Farm and Allstate have around 17,000 and 13,000 captive agents, respectively, who were trained to exclusively market their company's insurance products. If Allstate or State Farm, in a shot of competitive genius, decided to get an 800 number and cut out the middleman, they would be staring out at an army of their own jobless insurance agents.
Here, then, is what we know: (1) GEICO's business model enables it to consistently underprice its largest competitors, and (2) these competitors would find it very difficult to adopt this model.
Now, getting back to the more important matter: Why do we all see the green GEICO gecko everywhere we turn? As Warren Buffett explains in his most recent letter to shareholders, "A company (in a commodity-type business) holding a low cost advantage must pursue an unrelenting foot-to-the-floor strategy." One of the main ways GEICO has done just that is by ramping up advertising; it spends millions to teach a gecko how to do "the Robot."
The heightened customer awareness of GEICO's lower rates has caused its market share to jump from 1.9% in 1993 to almost 6% today. Looking at it another way, GEICO earned $2.1 billion in premiums in 1993 vs. $8.9 billion in 2004; that's an annual increase of 14% for 11 years. Who wouldn't be dancing after growth like that?
The final point worth considering, however, is that Progressive
It will be interesting to see how Progressive's new system competes with the dancing gecko over the next decade. Regardless of the impact, GEICO holds a uniquely competitive position among car insurers: With its 100% direct method, it should continue adding policyholders, rewarding Berkshire shareholders, and making geckos dance for years to come.
Looking for stock picks from a man who has a similar approach to Buffett's? Check out Philip Durell's Motley Fool Inside Value for well-researched, undervalued investment ideas.
Fool contributor Matt Thurmond owns one Class B share in Berkshire Hathaway and holds no shares of any other companies mentioned.