A Billionaire's Brand Strategy
Sunday, June 1, 2008
From his growing list of acquisitions, Warren E. Buffett seems to be investing like the world's richest 10-year-old boy, if that boy lived in 1955 America.
He is Coca-Cola's largest shareholder. He owns Dairy Queen. Last year, Buffett got a train set, buying into Burlington Northern Santa Fe Railway. And in late April, he bought a piece of the world's largest candy store, sinking $6.5 billion into the Mars-Wrigley chocolate-and-bubble gum merger.
What's next for the Nebraska billionaire investor? DC Comics? Daisy BB guns?
It is true that the 77-year-old Buffett frequently touts his childlike-love of cheeseburgers and Cokes. But his investment strategy turns out to be more sophisticated than that of a schoolboy with change in his pocket, drooling over a candy counter.
In the eyes of many, the Oracle of Omaha -- whose Berkshire Hathaway holding company owns or has major stakes in many iconic brands, including Fruit of the Loom, Kraft Foods and Johnson & Johnson -- looks like a brand investor.
Brand investors buy companies with well-known or well-regarded names -- Apple, Tiffany, Disney and McDonald's, to name a few. The belief is that even though a brand company may produce many unlike products, their qualities -- supported by strong management and a broad marketing and distribution system -- will translate into consistent, above-average returns over a long period.
"Really, nothing can go wrong with the Wrigley and Mars brands," Buffett said on CNBC after announcing that he would finance part of McLean-based Mars's buyout of Wrigley. "They have faced the test of time over decades and decades, and people use more and more of their products every day."
Brand name companies, said professional money managers who consider themselves brand investors, can often charge more for their products than their less-established competitors and weather tough times more smoothly because of their loyal customer bases. They also have the ability to leverage their name recognition to increase business -- whether it's expanding operations by attracting more Marriott hotel franchisees, launching a new flavor of Crest toothpaste or extending the Clorox brand from bleach to moist towelettes. In addition, brand companies tend to have dominance in their fields, making it difficult for new entrants to chip away at market share.
Such qualities, analysts said, are hard to measure but are certainly a force driving profits at companies whose products are consumed by millions of Americans every day.
"Brands themselves are what one might call soft assets -- they don't actually show up in the balance sheet of a company's financial statements," said Robert Millen, chairman and portfolio manager of Jensen Investment Management, which has shares in Procter & Gamble, Coca-Cola and Johnson & Johnson. "But the value of that brand is clearly in the business -- and it takes years and years to build. Once you've built that strength and you continue to feed it and support it over time, then you get . . . pricing power that allows the business to maintain margins throughout varying economic periods. Secondly, you get repeat business. And those two things lead to consistent earnings."
Branded products companies have a higher propensity to pass along price increases when they have increasing costs themselves, said Larry Coats of the Oak Value Fund. This can prove critical in a time of rising food and energy prices.
"The consumer is buying more than just the raw material," said Coats, whose top holdings include 3M, American Express, Oracle, and, perhaps unsurprisingly, Berkshire Hathaway. "They're buying something else, whether it's a trusted relationship, or confidence in the product, an acknowledgement of a higher quality."