I am in no position to be critical of the world’s greatest investor—my investing mistakes are bigger and more frequent than his.
But Warren Buffett’s slip ups over the past decade have lessons for us all. Giant global consumer brands—which Buffett thought had large and impenetrable competitive moats—are under assault.
Most recently, Kraft Heinz—which Buffett’s Berkshire Hathaway owns 27% of—has been in the headlines posting disappointing sales and profit numbers. Gillette’s decline also caught Buffett by surprise:
“It really surprised me that Gillette lost position. Men don’t like to experiment much. Women are better at experimenting,” he said. “But when you were a kid, ‘Gillette Cavalcade of Sports’ was your pal, and brought you the Rose Bowl, and the World Series, and all that sort of thing. You just shaved with Gillette the rest of your life. And you still do, to a great degree.”
Even his beloved Coca-Cola Company has returned less than 7% per annum over the past five years, including dividends.
Are their moats no longer impenetrable?
Losing the arm wrestle with giant retailers
So far the focus has been on the dynamic unfolding between retailers and brands. “There’s always that struggle [with] the brands”, Buffett says, “and there always will be.” “But the retailers, net, it has been moving in their direction.”
Homebrand products have improved dramatically in quality. Sales of Costco’s Kirkland homebrand now dwarf the whole of Kraft Heinz. Majority homebrand grocers like Aldi and Lidl are stealing market share from higher-priced competitors who stock far more external brands.
Both dynamics are putting pressure on established brands. Sales are not growing. And the brand owners are under immense pressure to cut prices or be cut from shelves.
There’s another aspect to the changing retail landscape, though, that is less discussed but just as important. And that is big brands’ former chokehold on advertising.
The broken monopoly on advertising
Have you ever wondered why the only ads you see on TV are for cars, alcohol and Coca-Cola?
When an advertiser pays for a slot on television, they pay for every set of eyeballs watching that station at that time. While they can target the most appropriate channel and the most appropriate program, there are always going to be people watching who aren’t the slightest bit interested in the advertiser’s product.
It’s a broad medium, and a lot of money is wasted marketing to the wrong people. But the brands that waste the least are the ones with the broadest appeal. So you tend to see products advertised that are consumed by a majority of the population. And, within each product category, the brand with the broadest appeal gets the most value out of the advertising slot.
Newspapers, radio and outdoor advertising all suffer from the same dynamic. Dominant brands get the most value out of the advertising slot, which means they can pay the most for it, which results in them staying dominant.
Niche brands can market again
Digital marketing is different. If I have a gluten free, vegan muesli that I want to sell, I can now market to a very narrow universe on Facebook. Give me all the yoga-loving vegetarians from Byron Bay.
You’ll still end up paying for some uninterested eyeballs, but it’s a medium that is vastly superior for niche brands and products. It allows them to build a brand by marketing only to a small subset of the population.
It’s no secret that the advertising dollars are shifting online and killing traditional media businesses. Less discussed is how symbiotic those traditional media companies were with the big brands.
From craft beers to kombucha drinks, you are now seeing challengers pop up all over the place. These niche products are not going to replace the staples—my coke-loving father is never going to pay $6 for a bottle of fermented kombucha. But they are going to keep eating away at the edges when the core is already under assault.
Acquisition no panacea
One solution is to buy the new challengers. Coca-Cola Amatil (CCA) recently bought the largest kombucha brand in Australia and global beer companies are swallowing craft beer brands every second week.
But it is a game of whack-a-mole that is proving very expensive to play. A CCA spokesperson celebrated their purchase with glowing praise of the Organic & Raw brand: “In just over eight years, Organic & Raw has gone from selling MOJO at a local farmers’ market to producing one of Australia’s leading organic kombucha brands”.
He should see those eight years as a sign of problems to come. They have lost their monopoly on advertising and it has never been easier to take on the big boys. There are plenty more MOJOs lining up to do exactly that.
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I think brands like McDonalds are different. When I’m overseas, I find the familiarity of these brands reassuring, especially when I don’t speak the language. And maybe a pervasive brand like Nestle is different too, maybe perhaps their products are less discretionary.
I think McDonalds are doing a great job of keeping the hoards at bay, but it’s never been easier to start a funky burger brand. And with Google maps and ratings, it’s never been easier to find one that you know is going to be good. It’s a great business for sure, but I reckon they wish the internet was never invented.
Nestle, a bit of a mixed bag. They are proving themselves more innovative than others but are vulnerable. Here’s a good recent article in the FT (subscription needed) Unilever/Nestle: Halo Effect
McDonalds is different in one important aspect – and that is the real estate requirement. It spends a lot of time and effort getting the best locations it can.
In general I agree, but sometimes I only want to pay five dollars for a burger instead of fifteen.
This is a great article, an interesting and correct insight.
Buffett is not in my top 10 of greatest investors, those who have advanced the art but he is one of the richest which is a marker in this game.
He conflated his own preference for these brands with a new generation’s interest in different products.
Of course he made his best returns following Ben Graham exactly and in recent decades more from being the biggest game in town – not afraid to whitewash the frauds of the financial crisis or rip the eyes out of poor people.
https://www.cnbc.com/2013/10/16/buffett-on-jpmorgan-jamie-dimon-will-survive-fine.html
https://www.seattletimes.com/business/real-estate/the-mobile-home-trap-how-a-warren-buffett-empire-preys-on-the-poor/
Whilst pretending to be a friendly uncle type figure.
His “advancement” to the field of investing is a penchant is for companies with monopolistic positions that contribute nothing but diabetes to the general populace. Like Sees Candy or Coke or shitty hot dogs made of offal and saturated fat.
Investment returns are often inversely proportional to the contribution of a business to society in my experience.
Sam, the main reason his returns were so much higher earlier in his career is due to his small amount of money he was investing. Buffett actually made most of his money when Charlie Munger influenced him on brands and he made investments in Coke & Washington Post, not the cigar butts as Graham taught him.
Trying to invest larger amounts of money is only going to make it more difficult to earn superior returns as your investing pool has shrunk. Like Berkshire now, it would be a complete waste of time to purchase undervalued securities for a few million dollars. To further this, there are arguments that Berkshire has been left in the past by technology companies, but the fact is, as the company is so wildly diversified to American business, they’re going to perform closer to the Dow etc.
I think any knowledgable investor has to respect Buffett and what his achieved, regardless of your investing ideology.
I invested AUD $200K into Berkshire about 7 years ago. It’s worth about $750K today – helped by a rising USD and falling AUD. Wanna compare that to the ASX 200 or Aussies property market?
You don’t think Buffett is the G.O.A.T.? A track record of over 50 years is not good enough? If not, who is and for how long?
In addition to investment returns, there are many investors who only want to “get rich once”. We trust Buffett and his management team 100%. We sleep well at night not worrying about dodgy things that could result in permanent loss of capital.
As for KO, a 7% p.a. return might not sound exciting but it’ll double your money every 10 years. The dividends have increased at a rate of 5% p.a. or more over 50 years… no other Australian company can compare. Have you checked your bank stock dividends or property net yields in the last 5 years? It’s pathetic in comparison.
Imagine your salary/retirement income increasing at a rate of 5% p.a. every year for the rest of your life? If you don’t think it’s exciting, just ask your Boss or Centrelink to match KO’s track record.
I still agree with the piece from a few years ago comparing Buffett to Gordon Gecko. Especially in the last 20-30 years. I’ve been less a admirer of him, especially since the Heinz deal.
I also hate how every value investing business use him as a way to get respectability by association.
On topic, I think the fading buying power of the baby boomers is also linked to the pain of big brands. Either by being more open to new things or financial constraints, younger generations are definitely big supporters of online only and niche brands.
Great post Steve. All very interesting. These new challengers are snapping at the heels of the likes of Coca Cola, yes. They are utilising new targeted marketing channels to reach a greater audience. Ok.
But what do they seek that Coca Cola etc already have? Scale.
How can they get to the sort of scale that will seriously challenge the likes of Coca Cola? By having a broader audience.
But how can they achieve breadth if their value offering lies in their niche?
Is the answer that consumer brands with broad appeal are history? No more winner-takes-all in consumer brands?
If so, that’s quite a dichotomy between consumer brands and “technology companies”, which are increasingly a winner-takes-all proposition.
Steve, Zaac sent this –
probably seen it but Naked who was in Enero
https://www.bandt.com.au/media/breaking-naked-merges-bmf