Collection: Warren Buffett - #240 'How Companies Gain or Loss Market Share'
[Transcript]
AUDIENCE MEMBER 00:00
Good afternoon, Mr. Buffett and Mr. Munger. My name is Kevin Truitt (PH) from Chicago. I have three questions for you.
And my third question, Mr. Buffett, you have talked about the importance of the franchise and sustainable competitive advantage.
Companies like Kellogg and Campbell’s Soup are companies that most people would have said had those qualities. However, over time, those qualities were lost as a result of a change in consumer taste.
What gives you confidence that the same things won’t happen to Coke or Gillette?
WARREN BUFFETT 00:40
You asked an interesting question about franchises, too, and mentioned Campbell’s Soup and Kellogg.
And, you know, I’m no expert on that but I would say that, just based on my general observation over the years, is that the problems there came from two different things.
I think that the problems with cereal — ready-to-eat cereal — were not so much changes in taste or consumption patterns. But I think they maybe just pushed their pricing too far to the point that they lost market share without getting — without having — the moat that they thought they had, as opposed to the General Mills cereals, and the General Food cereals, and all of that sort of thing.
I mean, if you’re pricing really gets out of whack and people regard Wheaties or Grape-Nuts in the same category as they regard Kellogg’s Corn Flakes, you know, you’re going to lose share. And once you start losing share, it’s hard to get back.
The problems with soup I think relate more to lifestyle. I think it’s become — it’s a little less — it fits in a little less well with current lifestyles, maybe, than 40 years ago.
Soft drinks, — the consumption of soft drinks — I don’t have the figures here, but I would wager that in 110 years, the per capita of soft drinks has gone up virtually every year throughout that history.
I mean, it’s now 30 — close to 30 percent — of U.S. consumption of liquids. So, if the average American has about 64 ounces of liquids a day, you’re talking about, say, 18 ounces of that being soft drinks and 43 percent of that 18, or almost 8 ounces a day, of being Coca-Cola products.
In other words, 1/8th of all the liquid man, woman and child in the United States take in comes from Coca-Cola products. But that has gone up, virtually — well, throughout the world it’s gone up on a per capita basis, you know, almost since soft drinks were discovered.
I would say that that trend is almost impossible to reverse on a worldwide basis. I mean, there’s so much potential in countries where per capita consumption is like — well, I think it’s, you know, maybe 8 per capita, which is — 8-ounce servings they talk in terms — 64 ounces a year.
So you have 1/50th of the consumption, per capita, on Coke products in many — in some important countries — that you have here. I don’t — I just don’t see it as being —
Now, you can push pricing too far. I mean, there comes a point — it depends on the country in which you’re doing it, but that depends even on areas within the country in which you do it.
But if you establish too wide a differential between Coke and a private label product, you will change consumption patterns somewhat. Not huge, but enough so that you don’t want to do it. But I don’t think you’ll see —
It’s interesting. Coffee’s gone down every year. People talk about Starbucks and all that, but if you look at coffee consumption in this country, if you look at milk consumption in this country, you know, per capita, it just goes down, down, down, down, year, after year, after year, after year.
And I think it’s pretty clear what people like to drink once they get used to it, and with the price right.
Interesting thing about Coca-Cola is, when I was born in 1930, a 6 1/2-ounce Coke cost a nickel and you put a two cent deposit on the bottle. But forget about that, just take the nickel.
Now you buy a 12-ounce can or a larger product, and you’re paying, if you buy it on the weekends in the supermarket special or something, you’re paying maybe a little more than twice per ounce what you were paying in 1930, 70 years ago.
And compare that to the price behavior of almost any product, you know, that you can find except raw commodities. But compare it to cars, housing, anything. And there’s been very, very little price inflation in it.
And I think that’s a contributor, of course, to the growth in per capitas over time.
Charlie, how about cereals and soup?
CHARLIE MUNGER 05:26
Well, I think those are examples where the moats got less hostile for the competitors.
Part of the trouble was the buying power got more concentrated and tougher.
I mean, the big grocery chains now have a lot of clout. And then you add the Walmarts and the Costcos and the Sam’s and the — it’s a different world faced by the Kelloggs than the one they had 30 or 40 years ago.
WARREN BUFFETT 06:02
Yeah, there will be a battle, always, between brands and retailers, because the retailer would like his name to be the brand.
And, to the extent that people trust Costco or Walmart more than they — or as much as — they trust the brand, then the value of having the brand moves over to the retailer from the product itself.
And that’s gone on for a long, long time. You know, the first — I would — cases I know about in any real quantity were back with A&P in the ’30s. And A&P, I believe, was the largest food retailer in this country. And they were also a big promoter of private labels. Ann Page I think was a big private label with them, for example.
And they felt they could convince the consumer in the ’30s that their brand meant more than having Del Monte on it or Campbell’s or whatever it might be in the different categories. And people thought they were going to win that war for a while.
And who knows? I mean, I don’t know all the variables that went into A&P’s decline, but it was dramatic. I mean, it was one of — it was a great American success story for a while, and then it was a great American failure.
Charlie, you —?
CHARLIE MUNGER 07:23
The muscle power of the Sam’s Clubs and the Costcos has gotten very extreme. A little earlier this morning, when I was autographing books, a very good looking woman came up to me and said she wanted to thank me.
And I said, “For what?” And she said, “You told me to buy this pantyhose I’m wearing from Costco.”
And I’d evidently made some previous comment about how amazing it was that Costco could get Hanes, of all people, to allow a co-branded pantyhose, Hanes-dash-Kirkland, in the Costco stores. That wouldn’t have happened 20 years ago.
WARREN BUFFETT 08:07
She must’ve been pretty desperate if she was consulting with you on where to buy pantyhose, Charlie. (Laughter) OK, let’s move to area 5.
(Source: https://buffett.cnbc.com/2001-berkshire-hathaway-annual-meeting/)
~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.
[YAPSS Takeaway]
The lesson on pricing is quite interesting.
YAPSS Takeaway:
"I think that the problems with cereal — ready-to-eat cereal — were not so much changes in taste or consumption patterns. But I think they maybe just pushed their pricing too far to the point that they lost market share without getting — without having — the moat that they thought they had, as opposed to the General Mills cereals, and the General Food cereals, and all of that sort of thing.
I mean, if you’re pricing really gets out of whack and people regard Wheaties or Grape-Nuts in the same category as they regard Kellogg’s Corn Flakes, you know, you’re going to lose share. And once you start losing share, it’s hard to get back." ~Warren Buffett
