Warren Buffett (Trades, Portfolio) is undoubtedly one of the most successful investors of our time, but it hasn’t all been smooth sailing for the Oracle of Omaha over the last decade.
One of Berkshire Hathaway’s (BRK.A, Financial) (BRK.B, Financial) biggest misses of the last ten years was its investment in Kraft-Heinz (KHC, Financial). To be a little more precise, it was the Kraft side of the investment that underperformed Buffett and his partner Charlie Munger (Trades, Portfolio)’s expectations. Here’s what Buffett had to say on the matter back in 2019.
A good business, but too expensive
Although he maintained that the business itself was a solid one, with the benefit of hindsight, Buffett believes that Berkshire overpaid for the Kraft portion of Kraft-Heinz. He also noted that Berkshire’s widely publicized involvement in the deal drove up the price even more - such is the penalty one pays for being one of the world’s best known investors. Even a great business can become a bad investment if the price paid is too high.
Another problem for Buffett and Munger’s investment was the increased competition from cheaper retailers like Amazon (AMZN, Financial) and Costco (COST, Financial):
“The business doesn’t know how much you paid for it, it’s going to earn based on its fundamentals, and we paid too much for the Kraft side of Kraft-Heinz. Additionally, the profitability has basically been improved, but Amazon itself has become a brand. Kirkland, at Costco is a $39 billion brand. All of Kraft-Heinz is $26 billion dollars, and Heinz has been around for 150 years. They spend billions of dollars on advertising their products and go through tens of thousands of outlets. And here comes a company like Costco establishing Kirkland, and that brand travels from product to product.”
The struggle between retailers and suppliers has been going on for as long as these institutions have existed. What Buffett is saying is that the balance of power might be shifting towards retailers like Amazon and Costco, who are able to promote their own brands, and who therefore have leverage over the suppliers.
Buffett went on to add that the best known brands like Coca-Cola (KO, Financial) are still in a good position, but that weaker brands will lose out.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Warren Buffett Explains the Difference Between IBM and Apple
- Li Lu Explains How He Determines a Margin of Safety
- The Value Investor's Handbook: An Introduction to Enterprise Value
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