Warren Buffet was famous for his annual letter the the shareholders of Berkshire-Hathaway. He used those letters to explain his thinking in various investments.
In one of those letters, he explained why he opted for "quality" especially when the economy seemed to be hitting a rough-patch. Even though I present the following in quotes, they aren't actual quotes. Rather, it is my best remembering of his logic.
"I bought shares of Coca Cola last year and I was asked why I didn't invest in companies with stronger positions in the lower market tiers...companies like Shasta, Faygo and companies that bottled 'house-brand' soda-pop."
"The logic my questioners bring up is that people change their consumption habits when money is short. They expect consumers to shift to cheaper products and the "quality brands" to take a beating."
"My logic is that the pricing power of premium brands means they have a much greater margin for price decay. Coca Cola doesn't pay more money for sugar or flavoring than commodity brands yet it can command twice the retail price. That difference in pricing power falls directly to the bottom-line."
"Yes, they spend a lot more on advertising, but that is a discretionary variable-cost that they can temporarily economize on."
"When the price of a house-brand drops by a dime a bottle, they lose money. When the price Coca Cola can command at the cash register drops by a dime a bottle, they are still very profitable."
"The same thing can be said about Hersey candy bars, Marlboro cigarettes, Dior lipstick and a host of other comfort/luxury items."
That's a good point and I can agree with it. Unless the corporate execs are looting the business and care more about how much they get to walk off with than how long the company lasts. And I have seen a lot of that up close over my time in business so I would assume it is probably something you could count on. ---ken.
ReplyDeleteI see premium name brand labels in dollar stores, but in bottles - containers much smaller than their competitors. Yet they still seem to sell. Apparently - its the label and not its contents that matter to some consumers.
ReplyDeleteIf you bring up Warren Buffet around here you will probably be met with scowls. His firm bought controlling interest in Fruit of the Loom and has reduced the head count by outsourcing IT to India and moving jobs overseas. He maybe a great investor but he is a sucky employer.
ReplyDelete