Carol Loomis: To what extent do changing dynamics in the consumer food market change your view of Kraft Heinz’s long-term potential?
Warren Buffett: Well, actually, what I said was that we paid too much for Heinz – I mean Kraft – sorry – the Heinz part of the deal, we originally paid a fair price there when we owned about half of Heinz. And it actually worked out for us. I had some priority items redeemed.
We paid too much for craft. To some extent, our own actions were driving up prices.
Now, Kraft Heinz, 6 billion in profits for that business — and I’m going to put it very, very, very loosely — I’m not predicting it, I’m not predicting it — but 6 billion before taxes on 7 billion in tangible assets is a great business.
But it’s possible to pay too much for a great business.
I bought See’s Candy. And as it turned out, we made a great purchase. And we could have paid more. But there were prices that could have been had at See’s Candy, and that wouldn’t have worked.
So the company doesn’t know how much you paid for it.
In other words, you earn based on fundamentals. And we paid way too much money for the Kraft side of Kraft Heinz.
Moreover, the profitability of these businesses has been fundamentally improved compared to the previous way of doing business.
But it’s absolutely true that Amazon is a brand in itself. Costco’s Kirkland is a $39 billion brand. Kraft Heinz’s total value is $26 billion. And it has – on the Heinz side – been around for 150 years.
And when it comes to their products, they are advertised as costing billions of dollars. And they go through tens of thousands of retailers.
And companies like Costco created the Kirkland brand. And its sales of $39 billion are more than virtually any other food company. And that brand moves from product to product. When brands move, that’s great.
So Coca-Cola is moving from Coke to Cherry Coke to Coke Zero and so on.
But having a brand that really moves you, and Kirkland does more business than Coca-Cola. and Kirkland operates approximately 775 stores. At Costco, we call them warehouses. And Coca-Cola is sold through millions of retailers.
Therefore, brands – retailers and brands – have always struggled with who has the upper hand in delivering products to consumers.
And there’s no question in my mind that retailers’ positions on brands vary widely around the world. In some countries, 35 percent and even 40 percent of soft drinks are private label brands. And we don’t get close to this in the US. So it’s very different.
But basically, retailers, specific retailers, the retail system, have gained some power. And especially when it comes to Amazon and Walmart and their response to it, and Costco and Aldi and other companies you can name, they’re gaining more power relative to the brands.
Kraft Heinz is still doing very well financially. But we paid too much. If they had paid 50 billion, it would have been a different business. You’ll still earn about the same amount.
Paying too much can turn any investment into a bad deal. What you cannot do is turn your investment into a good deal with small payments. That’s kind of how I got into this world.
But the idea of buying cheap cigar butts from a failing company or a failing business is not something we’re going to do anymore. We strive to acquire good companies at fair prices. And I made a mistake on the Kraft part of Kraft Heinz.
