One of the best investing cases of all time is definitely the Coca-Cola (KO, Financial) purchase made by Warren Buffett (Trades, Portfolio). While the company was having some identity issues, Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) started purchasing significant amounts of the company, an investment they still hold until this day. Charlie Munger (Trades, Portfolio) has dedicated full speeches to analyzing the competitive forces behind Coca-Cola's success, and during a lecture at the business school at the University of Florida, Buffett described the company's moat in his approachable manner. Since there is a great deal of wisdom in Buffett's remarks, I will try to comment on each paragraph separately.
Accessibility: "This is a product that in 1936 when I first bought six of those for a quarter and sold them for a nickel each. It was in a 6.5 oz bottle and you paid a two cents deposit on the bottle. That was a 6.5 oz. bottle for a nickel at that time; it is now a 12 oz. can which if you buy it on weekends or if you buy it in bigger quantities, so much money doesn’t go to packaging—you essentially can buy the 12 oz. for not much more than 20 cents. So you are paying not much more than twice the per oz. price of 1936. This is a product that has gotten cheaper and cheaper relative to people’s earning power over the years, and which people love. And in 200 countries, you have the per capita consumption use going up every year for a product that is over 100 years old that dominates the market. That is unbelievable."
Buffett mentions that a serving of Coca-Cola has become cheaper to get for the world than it was when the company was founded. When we combine a product that has a clear preference among its consumers, and it is readily available over the world (no matter where we go, we can always find a Coke), we get enormous leverage. If we couple this with the fact that that preference allows for steady price increases without affecting overall demand, we have a wonderful company.
Sustained demand and repetition: "One thing that people don’t understand is one thing that makes this product worth tens and tens of billions of dollars is one simple fact about really all colas, but we will call it Coca-Cola for the moment. It happens to be a name that I like. Cola has no taste memory. You can drink one of these at 9 o’clock, 10 o’clock, 1 o’clock and 5 o’clock. The one at 5 o’clock will taste as good to you as the one you drank early in the morning, you can’t do that with Cream Soda, Root Beer, Orange, Grape. All of those things accumulate on you. Most foods and beverages accumulate; you get sick of them after a while. And if you eat See’s Candy—we get these people who go to work for us at See’s Candy and the first day they go crazy, but after a week they are eating the same amount as if they were buying it, because chocolate accumulates on you. There is no taste memory to Cola and that means you get people around the world who will be heavy users—who will drink five a day, or for Diet Coke, seven or even eight a day. They will never do that with other products. So you get this incredible per capita consumption. The average person in this part of the world or maybe a little north of here drinks 64 oz. of liquid a day. You can have 64 oz. of that be Coke and you will not get fed up with Coke if you like it to start with in the least. But if you do that with anything else; if you eat just one product all day, you will get a little sick of it after a while."
This is perhaps a characteristic of Coke that goes overlooked, but is critical to its success. People are able to drink and drink Coke because it produces no taste memory. Give it a try, after two seconds your tongue will have no trace of its flavor. This provides consumers the ability to have several cans of Coke a day without being disgusted. Just by leveraging this simple fact, we get a very steady consumption per capita in the worst-case assumptions, and an increasing one in the most neutral of them. While there has been increased awareness of the damage that Coke can have on our health, it is certain that more servings of Coke will be consumed in five years than now.
"But in the end if you had bought one share at $40 per share and reinvested the dividends, it would be worth $5 million now ($40 compounding at 14.63% for 86 years!). That factor so overrides anything else. If you are right about the business, you will make a lot of money. The timing part of it is very tricky thing, so I don’t worry about any given event if I got a wonderful business what it does next year or something of the sort. Price controls have been in this country at various times and that has fouled up even the best of businesses. I wouldn’t be able to raise prices Dec. 31 on See’s Candy. But that doesn’t make it a lousy business if that happens to happen, because you are not going to have price controls forever. We had price controls in the early 70s.
The wonderful business—you can figure what will happen, you can’t figure out when it will happen. You don’t want to focus too much on when but you want to focus on what. If you are right about what, you don’t have to worry about when very much."
Buffett sums it up pretty well. "You don't want to focus too much on when, but you want to focus on what." With Coke, I believe that we can make certain assumptions with a greater deal of certainty than other companies. Thinking about when that will happen is a different story, but Coke's competitive moat allows investors to remain more confident about the future. Based on this, I believe that it is all a matter of figuring out a price at which we can obtain satisfactory results during the long-term.
What do you think?
