Historical Question on moat: KO and See's Candies

[zyzhu2000]

I understand the concept of moat. But I am very confused why Buffett thought that Coke and See's Candies had a moat. I often drink Coke, but I never really think that it is special. If there is no more coke tomorrow, I would not miss it much. It is the same for See's Candy. I bought some because Buffett raved so much about it. They were tasty for sure, but it was not something I would buy exclusively. I can't see what's wrong with giving a girlfriend candies of other brands.

 

Maybe it is personal taste. Maybe I happen not to think these are big deals. There are other things that I think are big deals but are probably not very important or desirable to others. But the problem is that when investing is concerned, my taste does not matter. It is the collective taste that matters. So the question becomes how I can reliably judge the taste of a crowd without being biased by that of my own.

 

Anyway, I am confused why Buffett thought there was a moat in Coke and See's Candy. I would appreciate if someone can explain it.

[rb]

Why do you shell out the money for coke?

[Seanzy]

A moat, or durable competitive advantage, is not so much about taste as it is about the cost to replicate equal earnings power and pricing power. Buffett has talked about this. He believes that even if he invested billions of dollars to create a cola that competes with Coca Cola, he would not be able to do it. This is because Coca Cola is one of the most recognized brand names in the world, and it is distributed everywhere. Coca Cola probably spends about $7,600 per minute on advertising.

 

Even if restaurants agreed to sell a competitor to Coke or Pepsi in their soda fountains, they probably would not make as much money on it, on average, in the long run. Lack of long term distribution growth would eventually force them out of the market. This is because Coke, over the past five or six decades, has actually LOWERED the cost to purchase its syrup each year, as its business scaled in distribution, thereby making it less likely for someone to be able to compete with it.

 

Regarding tastes, however, Buffett has mentioned that Coke has no "taste memory". If you drink tequila, you would get sick of it really quickly. Few people drink it before noon. But Coca Cola has no taste memory. You would be happy to drink it with an early lunch or throughout the day. You won't get sick of it.

 

Lastly, your tastes are an exception, not the norm. Go ask 30 people if they enjoy drinking a coke at lunch, the movies, or a sporting event. Don't ask them if they actually do so. Ask them if they ENJOY doing so.

[bookie71]

      In test after test folks can't tell the difference in Pepsi or Coke, yet most Coke and Pepsi fans (myself included) swear that they can tell the difference.

      We used to have a rule at our office that anyone traveling to California MUST bring back See's.

 

  I gladly pay more for Coke than store brand cola which is probably stupid, but I do and should know better.  That is the moat.

[zyzhu2000]

@rb, I buy Coke because it tastes okay, it contains caffeine,  and I have some fond childhood memory attached to it. But it is not something I will miss much if it disappears tomorrow. I did not buy the stock. This is about my understanding of Buffett's literature.

 

@Seanzy, thanks for the thoughtful response. So it is about brand loyalty, which is group psychology, which is mysterious.  A brand gives consumers some unique expectations of the product or service. But how do we know what brand will have loyalty and what brand will not? Brand in printer papers will not matter much, even if a certain brand of paper will have some unique texture/feel.  Some people swear by the Moleskine notebooks, but a lot of others seem content buying any reasonably high-quality notebooks. I personally don't have brand loyalty in things like toothpaste. So what makes Coke so special as opposed to yet another soda drink?

 

 

 

 

[cubsfan]

If See's does not have a moat - then why can't their profits be easily duplicated?

 

If I remember Buffett's numbers - all told, there is approximately $90M invested in See's.

That started with the $25M initial investment and another roughly $60-70M in expansion Capex.

 

If See's has cranked out some $2B in profits since this purchase, maybe they are earning $100M/year?

 

Not a fast growing business, but certainly with those enormous margins - they would have a target on them.

 

But no one can hurt See's - so there is your moat.

 

 

[longterminvestor]

Cokes moat is the fact that they have a huge distribution system that would take years to create and all coke does is make syrup. The hard work is done at the bottling plants - coke has started to buy those up because they are profitable. But for me, it’s the fact that coke could create a new product today and have world wide distribution immediately. That is a serious moat.

 

See’s is pure brand. Seasonal business and little to no capex make it a wonderful business. If it was scalable, it would be like Mars or Wrigley.

[Jurgis]

Why do you shell out the money for coke?

 

I don't.

 

Next question.

[Spekulatius]

Sees candy is lousy chocolate. That’s why they never could expand outside of California. Their moat is  habitual (which is a strong moat actually) , but they can’t expand. Lindt on the other hand has a true worldwide franchise and moat around chocolate.

 

Since I went low carb, I am eating 86% cocoa chocolate with my cappuccinos. I also like Ghiradelli‘s (which is owned by Lindt, I believe).

 

Coke is out for me. I drank it from time to time (diet) but stopped years ago. I also think it’s habitual.

[Jurgis]

Sees candy is lousy chocolate. That’s why they never could expand outside of California. Their moat is  habitual (which is a strong moat actually) , but they can’t expand. Lindt on the other hand has a true worldwide franchise and moat around chocolate.

 

Since I went low carb, I am eating 86% cocoa chocolate with my cappuccinos. I also like Ghiradelli‘s (which is owned by Lindt, I believe).

 

Coke is out for me. I drank it from time to time (diet) but stopped years ago. I also think it’s habitual.

 

What Spek said about chocolates.

 

Lindt FTW. Although I am trying to lower my sweets consumption - and I cannot eat high-cocoa chocolates. So I've been moving to some idiosyncratic choices with lower sugar content that nobody knows about. E.g. http://ruta.lt/en/products/chocolate

[rb]

@rb, I buy Coke because it tastes okay, it contains caffeine,  and I have some fond childhood memory attached to it. But it is not something I will miss much if it disappears tomorrow. I did not buy the stock. This is about my understanding of Buffett's literature.

 

@Seanzy, thanks for the thoughtful response. So it is about brand loyalty, which is group psychology, which is mysterious.  A brand gives consumers some unique expectations of the product or service. But how do we know what brand will have loyalty and what brand will not? Brand in printer papers will not matter much, even if a certain brand of paper will have some unique texture/feel.  Some people swear by the Moleskine notebooks, but a lot of others seem content buying any reasonably high-quality notebooks. I personally don't have brand loyalty in things like toothpaste. So what makes Coke so special as opposed to yet another soda drink?

Let's just put it out there as a place to start. Every single piece of research out the points that there is nothing different about Coke compared to another soda drink. They're all the same. Basically sugar water. The only difference is how much money Coke makes. Hence the moat.

 

A moat doesn't imply that the product is indispensable - you won't miss it if it's gone tomorrow. It's protection from competition and thus protection of it's margins. More along the lines of when you feel like a soda drink you'll likely choose coke. It also doesn't mean that if a company has a moat others don't. Coke has a moat. Pepsi has a moat as well. It's just that Coke's moat is likely a little wider and a little deeper than Pepsi's.

 

In regards to brand loyalty and purchase decisions. Things get very complicated. There is a tool that marketers use called a long form interview. Where they take a subject and a purchase decision and they drill down on it for 30-60 minutes. You will be SHOCKED how many variables go into making a purchase decision as simple as some gum. People don't even realize these variables until you press then on it and pull it out. It all happens in the background. But it's tremendously involved. So when you say fond childhood memory, believe me there's a lot there to unpack. Unsurprisingly fond childhood memories is actually a big part of Coke's business model --> Moat.

 

If you read Loosing My Virginity you will get a pretty good 3rd party description of Coke's moat at play. Richard Branson is probably one of the best marketers the world has ever seen. In the book he describes how horrible and foolish it was to go against Coke with Virgin Cola. I think he concludes that it was the hardest thing he'd done and his worst failure.

[zyzhu2000]

Cokes moat is the fact that they have a huge distribution system that would take years to create and all coke does is make syrup. The hard work is done at the bottling plants - coke has started to buy those up because they are profitable. But for me, it’s the fact that coke could create a new product today and have world wide distribution immediately. That is a serious moat.

 

 

Thanks. These are the "hard" qualities and make sense to me. However, I cannot find any reference to this logic in Buffett's literature. In fact I have never seen the logic explained other than that "even if he invested billions of dollars to create a cola that competes with Coca Cola, he would not be able to do it."

 

This said, if the true value of Coke lies in the distribution system, and if its executives recognize this too, then it is only logical for them to leverage this same distribution system to create other products. They could create an array of soda products, with some tweaks on the formula. But they didn't?

[bizaro86]

Cokes moat is the fact that they have a huge distribution system that would take years to create and all coke does is make syrup. The hard work is done at the bottling plants - coke has started to buy those up because they are profitable. But for me, it’s the fact that coke could create a new product today and have world wide distribution immediately. That is a serious moat.

 

 

Thanks. These are the "hard" qualities and make sense to me. However, I cannot find any reference to this logic in Buffett's literature. In fact I have never seen the logic explained other than that "even if he invested billions of dollars to create a cola that competes with Coca Cola, he would not be able to do it."

 

This said, if the true value of Coke lies in the distribution system, and if its executives recognize this too, then it is only logical for them to leverage this same distribution system to create other products. They could create an array of soda products, with some tweaks on the formula. But they didn't?

 

You know they sell Sprite, fanta, diet coke, etc right?

[coc]

Cokes moat is the fact that they have a huge distribution system that would take years to create and all coke does is make syrup. The hard work is done at the bottling plants - coke has started to buy those up because they are profitable. But for me, it’s the fact that coke could create a new product today and have world wide distribution immediately. That is a serious moat.

 

 

Thanks. These are the "hard" qualities and make sense to me. However, I cannot find any reference to this logic in Buffett's literature. In fact I have never seen the logic explained other than that "even if he invested billions of dollars to create a cola that competes with Coca Cola, he would not be able to do it."

 

This said, if the true value of Coke lies in the distribution system, and if its executives recognize this too, then it is only logical for them to leverage this same distribution system to create other products. They could create an array of soda products, with some tweaks on the formula. But they didn't?

 

I counted nearly dozen varieties on Coke and Diet Coke (itself a variety) in my local shop a few months ago. Cherry, orange, vanilla, all available as Coke, Diet Coke, Coke Zero, plus the originals, plus caffeine free of original and diet.

 

Coke has more than 500 individual brands. Its best selling product in Japan is Georgia Coffee.

 

Yes, enormous market power to create demand with advertising and long term habits, and always available distribution. Ever been to Venice? Coke available at every location. Imagine being a convenience store or grocery or warehouse or fast food restaurant without Coke or Pepsi products.

 

And of course, Coke creams off the top because they own the syrup making - the bottlers do the tough part. (Though Coke and Pepsi buy and sell these from time to time to fix them up, consolidate, etc.)

 

See’s sells holiday, valentine, and birthday presents for $20/lb, and millions of people are happy to pay. They make money one month a year when the stores are swamped and the internet business is rocking. Fabulous moat. No one in California sends Lindt to their family on Christmas. See’s is right sized to the area where it has dense demand. It would not earn great returns elsewhere because those habits don’t exist and the density isn’t there.

[bilo]

"moat" is visible via persistently high return on capital.  If persistant high return on capital exists, at least historically the business has had some type of moat.  The analyst's job is to determine if that is likely to persist.  Good case study on the type of change that can invalidate a moat would be newspaper business, where monopoly on local advertizing and classifieds was disrupted.  With Coke, I agree with most of what has been said.  Combine the habit forming chemicals caffeine/sugar with pervasive marketing, the worlds best distribution system, and the power of habit becomes overwhelming.