Collection: Mohnish Pabrai - #111 'Buffett's Investment In Coca-Cola, Part 3 Branding'



[Transcript]

MOHNISH PABRAI 00:00

Now we get to another set of mental model, which is the mental model on branding.


So the Coca-Cola Company basically, you know, now the market cap of Coke is about a $190 billion and I’m guessing they're, you know, probably 17 times or something, I think they’re probably making like, I don’t know, $12 billion or $13 billion or something in after-tax profits. And they’re – the Coca-Cola Company is always spends less than 10% of their revenue on branding.


And one of the things about the branding is, so, when you see a can of Coke, the can of Coke is actually branding. Because it’s all got the Coke brand everything, who’s pay for that? It’s the bottler. Is that part of the 10% that Coca-Cola Company spends? No. That Coke can is completely paid by the bottler, those red trucks you see, paid by the bottler. Right?


That’s also not part of the Coke's branding. It was all things that are – So every single case and can and stuff about the fountain displays and all that is all kind of continuous branding going on without them spending a dime. Others are spending the money on that.


And the – and they – when Warren invested in the Coca-Cola Company, they were spending less than a billion a year on branding at the time. And he said that “If you gave me a hundred billion and told me take away the market leadership of Coke, I would just return the hundred billion to you. It couldn’t be done.”


So, even though they had spent, so it had been a hundred years, it had grown. They were spending less than a billion, you know, a decade or two before that, the unusual thing about branding is that when things get etched in our brains, like Coca-Cola etched in our brains, it has this kind of multi-year effect. So, what Coca-Cola spends in 2016 on branding is not exhausted in 2016, it has residual effects even 50 years from now. So when you have a business that’s been added for a hundred years or more, that brand just keeps getting more and more popular.


And you know, one of the things, another mental model is that red and yellow are primary colours for humans, you know, we get attracted to red and yellow more than anything else. And that's – so when I look at logos and they use the colour red and yellow like McDonald’s makes great use of red and yellow, Wells Fargo does great use. So, especially logos with have those primary colours, I think they have more of an impact long-term than the non-primary colours.


And so basically, one of the things about Coke is that this brand has got itself so deeply etched into our psyche after all these decades and more than a century that the cumulative effect of everything they’ve done last hundred years exceed what they spent in the last hundred years in term of brand value, it significantly exceeds that.


So, Warren felt that for a hundred billion, you couldn’t take away the leadership of Coke and at the time they were investing in Coke, the market cap was less than 20 billion. So they were basically, actually I think it was probably less than – yeah, I think they – maybe 15 billion or something was the market cap. So, they had a huge amount that they could get.


And the other thing about Coke is that – we finally turn on PowerPoint, sorry to talk so long.


Okay, so the other thing about Coke is that these are some scenes from different restaurants in India, in the middle of nowhere actually, there’re not many cities or anything.


So, if you see the top restaurant there, it’s called Prakash Dhaba, that’s in the middle of nowhere in India and you see all the Coke signage everywhere. So here, how that happens?


So the bottler, the Coke bottler goes and meets the restaurant owner and says, "Listen, do you want to paint job?” And you know, “Do you need furniture? And all for free." He said, “Oh, yeah, of course, you know, furniture is great.”


So the furniture is going to be red. You see all the red furniture, the one table is probably what they had before. And then you know, the second is he said, “Do you want like us to put your business name on the top like –" He said, “Yeah, sure!”


So, what they do is you see on the left that Prakash Dhaba name is little bit there and the rest are all Coke, right?


And here’s the funny thing, the restaurant owner loves that. And why does he love that? He loves that because people trust him, you know, he got a trusted brand and so now they think, “Oh, you know this place, it can't be so bad, you know, we can get our Cokes and we can get all other food and all that.” So it's the – what Munger would call the association tendency.


So, what happens here is the Coca-Cola Company gives some matching funds to the bottler and tell the bottler, “Listen, go paint the town red. Okay, literally paint the town red and we will give you a little bit kind of a change.”


And so you see that the second picture on the left, is the inside, not the same restaurant, different restaurant, I think that guy is only an outdoor place. So here same thing, will give you a paint job and you know, all the furniture red, everything is red and the guy is probably very happy about it and such.


So basically the thing is that these types of signs and these types of insignia you would see deep in rural China, you know, very deep in rural China. You would see very deep in rural India, middle of nowhere you’ll see this. I mean the penetration is way beyond the cities and all of that, it is gone deep into the Hinterland. And so that distribution all the way down at that level is extremely powerful.


And so when you look at this brand, even though the company spend less than 10%, the actual, you know, amount of impact it has is just massive. You know, it just huge.


One time, I interviewed a guy and he worked for Coke in Atlanta and he’d lived with them all over the world who was originally from Morocco, and he was part of the team that managed the World Cup relationship for Coke with FIFA. That was his whole job, you know, football. You know, and not him – him and the, you know, probably 30 other guys at Coke, and so I’ll get into this a little bit later.


But the association tendency of being at places where humans are happy, you know, so the FIFA relationship with Coke and all the global sponsorships, the Olympics, you know, so these are, Disney, you know, so all of these places McDonald’s where people are generally happy, Coke wants to be there, right?


And so they’ve got this the etching of this brand over the decades in all these places all over the world, is huge right?


(Source: https://youtu.be/jfxOvdiac94)

 

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