To understand how Warren invests, you’ve got to understand how people buy. Besides his unbelievable patience, Warren pays close attention to what people buy–in good times and bad.
Last week, I found myself standing in a Wal-Mart in Los Angeles to prove one of Warren’s central points. Mind you, I’m not a typical Wal-Mart shopper but it’s part of a larger experiment to prove that Warren’s lessons are just as relevant on Main Street as they are on Wall Street.
As I stood between the Health and Beauty section, I watched as people loaded up on aspirins, bandages, shampoo, vitamins and the long list of other things we need on a day-to-day basis.
Wal-Mart aisles are the perfect places to watch how shoppers have changed their behavior since we entered into The Great Recession. For example, those used to buying Johnson & Johnson products have downshifted to Wal-Mart’s house brand Equate. For whatever reason, shoppers were able to look beyond Advil, a surefire winner for Pfizer and instead chose the cheaper version of what they desired. Score one point for Equate in a bad economy.
However, no more than 10 feet away from me, I saw something equally compelling. Those very same shoppers also wandered down the soda aisle. They bypassed the Sam’s Cola display, the other low-priced house brand sodas offered by Wal-Mart, and instead aimed their carts for the premium brand, Coca Cola.
So, dear reader, why would anybody go for the cheaper brand when it comes to driving away that killer headache or buying bandages designed to keep your blood inside your body, but choose the premium brand when it comes to sugar and carbonated water known as “the pause that refreshes?”
It comes down to one of Warren’s central tenets of investing and it’s called Durable Competitive Advantage. Coca Cola is a company that can easily protect and sustain its premium price point. Companies like American Express, Coca Cola, See’s Candy, Dairy Queen, Wrigley’s, BNSF, Gillette and Wells Fargo are organizations that live this concept each and every day. Their brands are so powerful that they drive their market. Coca Cola can raise their prices by 10% tomorrow without impacting their sales in a negative fashion. These companies do not have to reinvent themselves every four years, or in the case of the automotive industry, each and every year.
Coca Cola has engendered a ferocious loyalty over the years because whatever the economic situation, people will still reach for a Coke. The brand followed soldiers as the fought their way through World War II. Commercial artists at Coca Cola shaped how we perceive Santa Claus, in that red and white outfit, popularized by Haddon Sundblom. It’s a loyalty that allowed the company to survive when its flagship brand stumbled with New Coke in 1985, which ironically allowed Americans to fall back in love with the original flavor they’ve known all of their lives.
Even though Warren drinks a conveyer belt of Cherry Cokes on a daily basis, the reason Berkshire Hathaway owns 12% of Coca Cola’s stock (Stock Symbol KO) is that the flagship has an unshakable customer loyalty, they are on track to double revenues by 2020, they have a stellar price to earnings ratio of 20.5, but they have more than tripled their annual dividend since Warren began to invest heavily.
The decision made by those shoppers in Wal-Mart’s soda aisle bubbles up to the balance sheets at Coke’s Atlanta headquarters. Because Coca Cola has fully leveraged their Durable Competitive Advantage, they have built the most successful beverage delivery supply chain in the world.
So while Equate‘s brand of health and beauty related products can steal competitive share at will, the Durable Competitive Advantage of Coca-Cola allows it to be a diamond within Warren’s portfolio and a textbook example of how he invests.
For Warren, a Coke is a smile.
Until next time…