Learn to Love Scale, Part 3

 | Aug 13, 2014 | 1:00 PM EDT  | Comments
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hbio

In the past two columns (read Part 1 and Part 2), I described why a business with scalability is a powerful money generator for investors. I also discussed some of the characteristics of a scalable business.

A business that can create a new market or industry is going to benefit tremendously from scale. Think Apple (AAPL), Amazon (AMZN); decades ago, think names such Ford (F). A scalable business also has to be in an industry that is scalable. Also, a company that can create a new product or service, or even an enhancement of an existing product can be scalable. So it would be difficult, for example, to think of a newspaper company as being a scalable business.

Against this backdrop, I began thinking about some types of businesses that are scalable today. One such name is Whole Foods (WFM), a grocery chain. Why on earth would a grocery chain be scalable? In the case of Whole Foods, it is due to product differentiation. Whole Foods has brought natural and organic foods to the masses. Twenty years ago, such products were basically available only via small local shops located in esoteric locations. Over the past 20-plus years, Whole Foods has changed that.

As a result, Whole Foods has come to dominant this niche grocery segment. Plus, it has no other competitor of any significance. Most competitors are local farmers' markets or regional chains. With approximately 400 stores, Whole Foods possesses tremendous scalability potential over the next several years.

Scale can also come from a small company in a very big industry. Harvard Biosciences (HBIO) is an excellent example of this. This $150 million medical name distributes and manufactures medical instruments for suppliers. I like that Harvard Bio distributes the small, yet essential supplies, including syringe pumps, gloves, clamps, and other lab equipment. The company distributes hundreds of products to universities, government labs, and pharmaceutical and biotech companies all over the world.

Ten years ago, the company's sales were around $10 million. Today they exceed $100 million. Now that is scaling up. This business has had the opportunity to scale up significantly. A new management team has really enhanced the quality of this company and they anticipate that 2014 will be a bridge year, which will return the company to growth in 2015. Medical products and supplies constitute a multi-billion dollar industry Harvard Biosciences is a company that was founded in 1901 in Massachusetts and is the only one with rights to use Harvard in its name.

Scale is something few talk about because to appreciate its potential you have to think long term. In growth-oriented investing, the focus is often on the next quarter, but with scale, the investment returns are almost always unmatched.

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