Scale Economies Shared — The Best Idea in Modern Investing
September 17, 2025
11 min read
Scale Economies Shared — The Best Idea in Modern Investing
Some companies grow because they give more than they take. They reinvest efficiency gains into lower prices, faster delivery, or better service — turning scale into customer loyalty, growth, and durable moats. Our original analysis for The Market by NZZ — plus the extended investor's view for arvy readers.
The thesis on video — 1 minute
In 30 seconds — the core thesis
- "Scale Economies Shared" — some companies become more efficient with growth and pass that efficiency back to customers, instead of pocketing it as margin. Sounds paradoxical, but it's strategic.
- From this emerges a flywheel: lower prices keep customers coming back, higher volumes drive more efficiency, efficiency deepens the moat. Each turn makes the system harder to attack.
- Short-term earnings look thin — long-term a dominant position is built. Investors in such companies aren't betting on a quarterly earnings beat, but on a system. The category is one of the most powerful in modern investment history.
The original analysis — the opening
Cutting prices to make more money: At first glance, it sounds like a business blunder, not a masterstroke.
Most companies scale up and use their power to fatten their margins or pad executive paychecks. But a rare breed of companies flips the script. As they grow more efficient, they don't hoard the benefits — they pass them back to customers. Instead of raising prices to boost profits, they cut them to cement loyalty.
This creates a powerful flywheel effect:
The Flywheel — Scale Economies Shared
Lower prices keep customers coming back
→
Higher volumes drive more efficiency
→
Efficiency deepens the moat
The longer companies stick to this system, the better they get. Not by accident — but strategically. Every additional dollar flows back into faster delivery, more attractive prices, and more robust infrastructure. Short-term, returns at these companies looked thin, but long-term they have built a dominant position. For investors, this wasn't just about a good company. They were betting on a system — a flywheel powered by customer goodwill and increasing efficiency.
Stock market history has given us two outstanding examples of this playbook. And at arvy we own a company that is right at the beginning of this journey. We know the playbook in its early stages well.
The idea? Scale Economies Shared.
→ Read the full article with the three concrete examples on The Market by NZZ
Chart 1: Scale Economies Shared — the mechanics
Source: NZZ The Market
01The uncomfortable question behind the NZZ analysis
If Scale Economies Shared (SES) is so powerful, why don't all companies do it? Why is it a rare breed and not the standard? This question is the actual core of the concept — and it's necessarily handled compactly in an NZZ column. The answer is more profound than it sounds at first: SES requires an unusual combination of ownership structure, leadership discipline, and investor patience that doesn't come together in most companies.
Look at the typical listed-company reality. Quarterly numbers are celebrated or punished, executives are evaluated on margin and stock performance, investors switch positions on average every 7 months. In this world, the temptation is overwhelming to immediately cash in efficiency gains as margin — the CEO is rewarded, the stock rises, everyone is happy. Until the competitor who passes efficiency back to customers gains market share three years later and turns the industry upside down.
SES only works under three conditions that rarely come together:
- Leadership with a long-term horizon — typically founder-led or with significant insider ownership. Anyone not thinking over the next ten years won't give up margin for 2030s advantages.
- An investor base that understands the system — and tolerates quarterly thin margins because they know what's structurally being built. This investor base is small and must be actively cultivated.
- A business model with real scale leverage — where efficiency gains actually grow non-linearly with volume. That doesn't apply to every business. Some sectors are structurally asset-light scalable, others are not.
The intellectual heritage
The concept was elaborated, among others, by Nick Sleep, the legendary manager of the Nomad Investment Partnership (2001–2014), as a central investment idea. His letters to investors are today required reading for quality investors. The two textbook examples from his investment history: a US grocery retailer and an online retailer that changed the world. Both companies turned the flywheel for decades, both were often criticised for their "thin margins" — and both ultimately delivered extraordinary returns to investors who held on.
02The anatomy of the flywheel — three building blocks that all must come together
SES is more than just "being cheap". That would be the superficial reading, and it would be wrong. Some discounters pass efficiency gains on without building a durable moat — they're simply price leaders until an even cheaper competitor comes. Real SES needs three building blocks that work together:
Building block 1 — Real scale leverage
The business must have structural scale advantages that grow non-linearly with volume. At a classic retailer it applies: double inventory costs double. At a distribution giant with own warehouse and logistics infrastructure, double volumes might cost only 1.6× — the difference is scale leverage. At a digital business with high fixed costs and near-zero marginal costs, the leverage is extreme. Without this mathematical leverage, the entire SES system doesn't work — it remains a simple price war.
Building block 2 — Structural reinvestment over margin maximisation
Management must systematically and credibly not pocket scale gains as margin. This must be anchored in the company culture — it cannot be subject to quarterly decisions. Costco for example has had a self-imposed margin ceiling of around 14% for decades, everything above is given back to customers. Such culturally anchored rules are extremely hard to replicate — and exactly that makes them so valuable.
Building block 3 — Customer benefit amplification, not just price
Real SES doesn't just give back lower prices, but amplifies the overall benefit for customers — faster delivery, broader assortment, better quality, easier handling. Pure price reduction is a race-to-the-bottom strategy that anyone can copy. Real SES creates a benefit spiral that is structurally hard for competitors to replicate, because it builds on scale that the competitor would first have to build themselves.
The magical combination
When all three building blocks come together, a self-reinforcing system emerges: every turn of the flywheel makes it harder for competitors to keep up, because the counterparty has to compete not only in price but in scale efficiency and customer benefit depth. Over decades this leads to market shares that look monopolistic — without the company ever having acted like a classical monopolist. It has simply given customers more than any competitor could.
03What this means for your quality portfolio
Here the SES lens becomes practically interesting. It helps with the most important decision step in quality investing: which moat stories are real, which are superficial? Most businesses with "strong market position" have a moat that erodes at some point — because competitors catch up, because markets shift, because new technologies change the rules of the game. SES businesses are the rare class whose moat deepens with each turn of the flywheel.
Three questions that identify a real SES champion:
| Question | What to check |
|---|---|
| 1. Do margins not improve with growth? | At classic quality businesses, margins rise with scale. At SES businesses they remain structurally constant — because efficiency gains are passed on. |
| 2. Is there a culturally anchored reinvestment rule? | Self-imposed margin ceilings, explicit competitive position investments, long-term oriented compensation structures for management. |
| 3. Do market shares grow even in difficult times? | SES businesses typically gain market share most strongly in recessions because their price-benefit ratio is then particularly hard to beat. |
Anyone who can honestly answer these three questions with yes has a real SES champion in front of them. Such businesses are rare — perhaps 50 worldwide at any given time. But anyone who recognises them early and holds them over decades often has the best long-term returns of their portfolio.
| Investor profile | Typical SES allocation | What to check |
|---|---|---|
| "I follow the MSCI World" | Low — few of the largest SES champions are in top-10 index positions | Consciously consider adding as a strategic position |
| "I focus on hypergrowth" | Tendentially low — SES businesses often grow "only" 10–15%, not 40% | Review long-term compounders as stabiliser and long-term wealth base |
| "I'm engaged in quality compounders" | Variable — depends on how sharply the SES lens is applied | Test existing positions with the three questions above |
| "I know SES and invest deliberately" | Concentrated on few deep positions | Hold discipline, don't sell in volatility — the system needs time |
How this SES lens is applied in practice in stock selection — and why disciplined quality investors often accept multi-year holding periods for such champions — is deepened in our pillar article The Tortoise Problem: Why Quality Wins. The concrete arvy allocation is in the Q1 2026 Quarterly Report.
04Three scenarios for an SES champion
SES is a strategy that works over very long periods. For an individual SES champion the next 18 months are less decisive than the next 10 years. But for investors thinking about entry, build-up, or holding today, the plausible paths help:
Bull Case
Flywheel accelerates — market share grows faster than expected
A competitor comes under pressure or a new channel is opened. The SES mechanism accelerates, market shares grow faster, stock price reflects structural strength. In this scenario disciplined long-term holders win above-average. But even here applies: flywheel businesses are not stock fireworks — they deliver steady compounding returns, not ten-bagger-in-two-years stories.
Base Case
Steady compounding returns, occasional multiple swings
The flywheel keeps turning as planned. Market shares grow constantly, efficiency gains continue to be shared, brand perception strengthens. Stock price reflects the fundamental value creation over long periods, with phases of relative over- and undervaluation. Investors who hold through volatility and don't sell at every margin discussion harvest the structural value creation. Our base case.
Bear Case
Disruption or strategy shift breaks the flywheel
A fundamental disruption (new technology, regulatory intervention, entry of an even larger player) or a management change with different strategy can bring the flywheel to a standstill. If that happens, the stock is no longer SES — it's a classic business with historically inflated valuations. Corrections can then be large. That's the most important risk factor: not every SES business stays one forever.
How disciplined investors navigate exactly these phases — and why quality strategies across full market cycles even make the reward structure of the SES mechanism accessible in the first place — is described in our pillar "Investing in Turbulent Times".
05What you should review now
An honest self-assessment takes 30 minutes and is the most valuable step for anyone who wants to understand and implement SES as a concept. Four concrete checks:
1. Identification exercise. Go through your current top-10 positions. How many of them simultaneously meet the three SES criteria (scale leverage, cultural reinvestment, customer benefit amplification)? For most investors the answer is: none to maximum one. That's not necessarily a problem — but it's worth a conscious observation.
2. Watchlist build-up. Which businesses do you observe that actively run the SES mechanism? There are perhaps 30–50 real candidates worldwide today — the research takes weeks but pays off for any long-term investor. arvy's Weekly newsletter regularly covers such champions in depth.
3. Holding-period realism. SES champions deliver their magic over 10–20 years. If your investment horizon is shorter, or if you sell in every 30% drawdown, this strategy is not for you. Honestly acknowledging that is more important than fooling yourself. SES investing is not a universal strategy — it's a discipline strategy for a specific investor personality.
4. Valuation discipline here too. Even the best SES champion is a bad investment at a high price. The SES logic doesn't protect against valuation traps — it only defines which businesses qualify in the first place. Disciplined SES investors sometimes wait years for reasonable entry points. That's part of the strategy, not a failure.
What disciplined investors do now
They don't panic-sell their existing positions to rotate into SES businesses — that would be strategy hopping. They gradually build a watchlist, learn the few real SES champions in detail, and wait for reasonable valuations to build positions gradually. Over 10–20 years a disciplined SES allocation compounds into a lead that can no longer be caught up — even versus broad quality strategies. That's the reward structure of the best idea in modern investing.
06Frequently asked questions
Which arvy company "right at the beginning of this journey" does the NZZ analysis specifically mean?
The concrete position is documented transparently in the arvy Q1 2026 Quarterly Report. We deliberately don't communicate blanket single-stock recommendations outside the quarterly reports — that would be neither fair toward our strategy investors nor useful for investors who should do their own research. What we can make public: the mechanics that lead us to such positions are exactly what this companion piece describes.
Which two "outstanding examples" of stock market history does Thierry mean?
The intellectual heritage of SES traces back to Nick Sleep and his Nomad Investment Partnership (2001–2014). The two classic textbook examples from his period are a US grocery retailer and an online retailer — both turned the flywheel over decades and delivered extraordinary returns to investors who held on. The specific names are in the NZZ original and in any serious quality investing literature on Nick Sleep.
Doesn't this sound too good to be true? Where's the catch?
Three real catches: (1) SES businesses trade at typically high multiples because many investors understand the concept — valuation discipline is hard. (2) Most SES stories need 10–20 years to deliver the full reward structure — many investors don't hold through. (3) Not every "apparent SES" is real SES — most candidates don't meet all three building blocks under close scrutiny. The system is real, but rare and hard to sustain in practice. Exactly that is why it works for the few who discipline it.
Does SES also work in Europe and Switzerland, or is it a US phenomenon?
The concept is universal — the specific accumulation was in the US because the largest home market with uniform consumer preferences enables scale leverage most directly. In Europe there are also SES businesses, often in niches or in B2B areas. In Switzerland less common because the home market is too small for the scale leverage — but Swiss champions that scale globally early can use the model. Applying the SES lens is sector- and geography-independent useful.
Further reading — the thematic anchors of this analysis
The Tortoise Problem
SES as a special case of quality investing mechanics
arvy Quarterly Report Q1 2026
Current allocation transparently documented
Quality Is Dead, Long Live Quality
The five quality criteria as precondition
Trees Don't Grow to the Sky
The growth zone behind SES (7–20%)
Investing with arvy: The Complete Guide
How SES fits into the overall strategy
Why arvy
The full strategy and positioning explanation
The flywheel is the strategy
Scale Economies Shared is not a property a business has — it's a strategy a company must consistently pursue over decades. Exactly that makes it so rare and so valuable. Most businesses can't resist maximising short-term margin. The few that can build over time a market position that looks monopolistic — without ever having acted like a classical monopolist. They have simply given customers more than any competitor could.
For investors the reward structure is correspondingly asymmetric: short-term such businesses often appear boring or unspectacular. Thin margins, slowly growing earnings, occasional valuation drawdowns. But over 15–20 years real SES champions compound in a way that few other stock classes reach. Anyone who understands the concept, identifies the few real champions, and has the patience to hold through the boring phases — has access to one of the most powerful wealth-building mechanisms in stock market history. Exactly that is why we call it the best idea in modern investing.
Original written by Thierry Borgeat, Co-Founder of arvy, for The Market by NZZ. The extended arvy companion piece reviewed by Patrick Rissi, CFA and Florian Jauch, CFA. Data sources: NZZ The Market, own analyses, Nick Sleep / Nomad Investment Partnership Letters (2001–2014). Last updated: April 2026.
Disclaimer: This article is for general educational purposes and does not constitute personal investment advice. The security designations mentioned are illustrative and not buy or sell recommendations. Past performance is no guarantee of future results. Scenarios are assessments, not forecasts. arvy is a FINMA-supervised asset manager with a CISA licence (Art. 24). Imprint & Legal Notice.
