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Morningstar | Geberit Seeing Softness in Some Markets in Line With Normal Turns in the Cycle; Moat Intact

Geberit’s 2015 acquisition of bathroom ceramic maker Sanitec increases its exposure to more-competitive markets. In its core markets of German-speaking Europe and Benelux, Geberit is the most important supplier of concealed cistern tanks to local distributors. It reinforces this position through a bonus structure that scales up payments based on increasing volume and "shelf space". Because local distributors in these markets are so well incentivised to sell Geberit's products, competitors face difficulties gaining the same shelf space and volume. In markets where Geberit is dominant, so is Sanitec, and in markets where Geberit is still trying to break through a wall of established competitors, Sanitec has at best 30% market share. This is strong, but not as dominant as the 80% we believe Geberit has in Switzerland, and likely Germany too. Other well-established brands (such as Villeroy & Boch, Roca, and Ideal Standard) also compete in those markets. These companies offer products, such as toilet bowls and sinks, that complement Geberit’s plumbing installation systems. With the Sanitec merger, Geberit is now a direct competitor. Villeroy & Boch and Roca have begun offering their own concealed tank cisterns and could follow Geberit’s strategy by acquiring one of the smaller concealed toilet manufacturers, such as Wisa or Viega, in an attempt to accelerate this business. As the company markets its installations more aggressively in Sanitec’s markets, it will be difficult for Geberit to avoid helping its competitors at the same time. To gain share in new markets, Geberit needs to increase the conversion rate from traditional toilet installations to behind-the-wall ones. Geberit has a large experienced salesforce to do this, but the more successful it is in educating new markets on the advantages of concealed cisterns, the easier it will be for its competitors to sell their product in these markets. This is different from the company's early days. When Geberit started selling concealed installations in the 1960s, it had fewer competitors. From conversations with plumbers, we do not believe Geberit's products differ materially from those of its competition.