What Is an Economic Moat (and Why Does It Matter)?

What do great businesses have in common with medieval castles? Quite a bit, according to legendary investor Warren Buffett. Like the circle of water surrounding a castle to stave off intruders, many successful businesses have figurative moats in the form of durable competitive advantages that make it difficult for competitors to erode their profits.¹ Buffett calls these “economic moats.”

Whether they be brand power, patents or cost advantages, they help businesses defend market position and generate returns over time. That, of course, can have a direct impact on investors and stock markets.

Here’s how you can identify companies that are well positioned to keep competitors at bay, and why economic moats don’t necessarily guarantee a successful investment.

What exactly is an economic moat?

An economic moat might sound like something out of a fairytale, but it’s an investing concept that was made famous by Buffett in the 1990s when he said that he uses the moat analogy to evaluate businesses.² They create a competitive edge that allows a business to attract and retain customers, maintain profits and fend off rivals over the long term. Companies with strong moats often find it easier to grow, charge higher prices or earn better margins because competitors can’t easily copy what makes them successful.³

Morningstar^‡ analysts give every company an economic moat rating of wide, narrow or none. A wide rating is given when a company’s competitive advantage is expected to last more than 20 years, narrow for 10 years, and none for those with no perceived competitive advantage or one that is likely short-lived. The group of roughly 20 analysts, spanning sectors and geographies, uses fundamental research to determine if a company holds one or more competitive advantages, and whether they will result in long-term excess returns. (You can find Morningstar’s Economic Moat Ratings on the RBC Direct Investing platform under the Research tab when viewing an individual security).

What are the types of economic moats?

Modern companies can build competitive advantages in many different ways.⁴ Here are some examples:

• Brand power: Think about the products you buy. Whether it’s your favourite coffee, smartphone or running shoes, a familiar brand that people consistently rely on for quality products and customer care can create customer loyalty that’s difficult for competitors to break.
• Network effect: A product or service can become more valuable as more people use it. A ride-sharing service, for instance, becomes a better platform if more riders and drivers join. The same can be true for social media platforms like Instagram or LinkedIn.
• Switching costs: Have you ever thought about changing service providers but didn’t because it would be too expensive and time-consuming? When the drawbacks of making a switch outweigh the benefits, companies can gain strong pricing power and more predictable revenue.
• Cost advantage: Some companies, like big-box retailers, simply produce goods or services more efficiently than others. They may have massive scale, access to cheaper suppliers, proprietary technology or highly efficient operations that allow them to offer lower prices and reap bigger profit margins than their competitors.⁵
• Intangible assets: Patents, branding, licences and other intangible assets can prevent competitors from duplicating a company’s products, allowing them to charge higher prices.⁶ For example, when a pharmaceutical company patents a new drug, the patents blocks competitors from developing and selling a similar one. This allows it to charge premium prices and earn higher profits – at least until that patent expires.
• Efficient scale: When a market can only support one or two companies, it’s easier to keep rivals at bay. Think railroad or pipeline operations – there’s only so much room for infrastructure such as tracks, pipes and transportation networks to be built, allowing a few companies have control over the sector’s fortunes.

Why do investors pay attention to economic moats?

Just as a castle’s moat helps protect the castle from invaders, an economic moat helps protect a company’s market share from competitors. For long-term investors, this can be appealing. When competition is limited, companies tend to have strong pricing power, greater efficiency and lower costs, which allows them to deliver higher returns.⁷

That said, an economic moat isn’t permanent or guaranteed. Competitive advantages can weaken over time as new technologies emerge, consumer preferences shift, patents expire, regulations change or rivals find ways to catch up.⁸ That’s why investors may not only want to think about whether a company has a wide moat today, but also whether it can maintain one well into the future.

Does a wide moat always signal a good investment?

Of course, moats are subject to attack. While strong competitive advantages give us clues about a company’s long-term potential, they don’t guarantee outcomes.

History provides some good examples. Take Blockbuster, for instance. In its heyday, the company had strong brand recognition and massive scale with over 9,000 locations across 25 countries,⁹ dominating the home video rental space. But with the introduction of streaming platforms, the business struggled to compete and eventually filed for bankruptcy in 2010.¹⁰

The Hudson’s Bay Company is a more-recent cautionary tale. At its peak, Canada’s longest-running company operated more than 100 stores across Canada.¹¹ But the rise of modern discount competitors and online shopping ultimately dismantled the company’s competitive advantage, and it filed for bankruptcy in 2025 – after 355 years in business.¹²

These examples show that even a well-known brand can be made obsolete and its moats overtaken. That’s why economic moats shouldn’t be thought of as permanent, but instead as advantages that need to be maintained over time.

The bottom line

Economic moats can help explain why some companies remain industry leaders for decades while others struggle to stay ahead. For investors, including famously successful ones like Warren Buffett, understanding economic moats can offer a useful way to look beyond short-term market headlines and focus on the underlying strength of a business.

So, when evaluating a company, remember that an economic moat is just one piece of the investment puzzle – and some dry up sooner than others.