2002: Is Coca-Cola still an "inevitable"?

AUDIENCE MEMBER: Mr. Buffett, my name is Pete Danner (PH) from Boulder, Colorado. And I would also like to thank you two for what you bring to the game.

I heard your response to the Coke — to the question regarding Coca-Cola.

In the annual report a few years back, you described Coca-Cola and Gillette as the two “invincibles.”

With Pepsi as a strong competitor today, do you still continue to view Coca-Cola as the “invincible?”

Additionally, with respect to American Express Company, with last year’s financial results at American Express, how do you now view American Express?

WARREN BUFFETT: Yeah, I think the term I used was “inevitables,” actually, but it’s very close to the same thing.

And I would — and I think when I made that statement, I said Coca-Cola in soft drinks or Gillette in blades and razors. I mean, I did not extend them to the entire corporate portfolio, particularly in the case of Gillette, but to the blade and razor business.

Gillette now has 71 percent, by value, of the blade and razor business in the world. Just think of that. I mean, 71 percent.

Here’s a product that everybody knows what it does, they know how to — you know, they know where it’s sold, they know that it’s a high-margin business. I mean, it isn’t like the world — the capitalist world — is unaware of the money that could be made if they could knock off Gillette.

But they can’t knock off Gillette, and it’s 71 percent. And that’s a little higher percentage than when I wrote about it.

Actually, Coca-Cola’s worldwide market share is a little higher now than it was when I wrote that five years ago.

And I would say that five or 10 years from now I would be amazed if Gillette or Coca-Cola has lost market share in their respective fields.

Coca-Cola sells half, roughly, of the soft drinks in the world, and soft drink consumption per capita goes up, basically, every year, and the per capitas go up — I mean the capitas — go up every year, also.

So you get these gains, maybe they’re 3 percent or 5 percent in units, or 4 percent, 5 percent in the first quarter, but it was poorer than that. I think it was 3 percent last year.

But when you have half the world, and the world’s population is growing at a little under 2 percent and you’re getting 3 percent or 4 percent from something as pervasive as soft drinks, you know, you are doing all right.

And it was crazy, in my view, for people to think that earnings can grow 15 or 18 percent a year in a business where units — we had half the world’s business, and units are going to grow fine — but they’re not going to grow anything like 15 or 12 percent or 10 percent.

The Coca-Cola business has done fine. People went crazy, in terms of valuing some of these businesses a few years back, and I think we had some cautionary language in there, generally, about the valuations at which the businesses sold.

But the businesses — at 71 percent in blades and razors, that is a — there’s some countries where it’s 90. In the U.S., it’s also about 70 percent.

Those are huge market shares of something people use every day. In this country, you know, it’s a little over eight ounces per day, more like — well ,actually more like 9 1/2 ounces per day — for every man, woman, and child in the United States, out of the 64 ounces they drink.

Well, you’re not going to have galloping percentage increases from that arena. But the company’s made, basically, good progress.

People got carried away from the stock — with the stock — and I would argue that they may have gotten encouraged a little bit too much by, not only Wall Street, but even by company pronouncements, in terms of attainable — possibly attainable — gains.

There aren’t large companies —you know, there may be one someplace, somehow, very large now that will grow at 15 or 18 percent a year — but it just isn’t in the cards in the world.

And we don’t want anybody to think Berkshire can do that either, because we can’t do it from a very large base. The world doesn’t allow that.

But it does allow making reasonable progress, and certainly Coke and Gillette, in those areas where I said they were inevitable, have done very well.

They haven’t — Gillette has not done as well with acquisitions, which is clear.

I mean, the Duracell — the Gillette acquisition of Duracell — resulted in giving 20-odd percent of the business for another business, and that business has not done nearly as well as either the management or the investment bankers thought it was going to do at the time the deal was made.

Charlie?

CHARLIE MUNGER: Well, I would say, regarding that last instance, that that’s the normal result.

When you try and — you’ve got a wonderful business and you issue shares in it to buy another business, I’d say at least two times out of three, it’s a terrible idea.

WARREN BUFFETT: Well, GEICO is a great example. GEICO is a wonderful business. Absolutely wonderful, gets more wonderful by the day, has the world’s best manager, Tony Nicely, running it.

GEICO, in the last 20 years, went into three — at least three — other insurance businesses I can think of.

They went into Resolute Insurance, which was a reinsurance operation started in the mid-80s. It was a disaster.

They went into two others, Southern something or other, and another one that started with an M.

I don’t know why in the hell they would go into them. I mean, they had a great, great insurance business, and there aren’t that many great insurance businesses. And neither one of those amounted to anything. I think, you know, they sold them off at some point.

But why would you have an absolutely wonderful business and start one and buy two others that are obviously mediocre, where you bring nothing to the party?

But managements — it’s very human to want to do that. It’s no great sin that the GEICO management did it, because we see it happen time after time after time.

I can tell you this: Charlie and I have no urges like that. I mean, we want to buy easy things. We do not have to prove our manhood by doing something terribly difficult.

And I think a lot of managements feel that necessity. They’ve got a wonderful business —

The cigarette companies did that. Cigarette companies had these great businesses, and, you know — it irritated them that they — they liked to think they’re business geniuses, so they would go out and buy other things and those other businesses, generally, did not do that well.

I’m not saying they should’ve been in the cigarette business in the first place, but they were not business geniuses because they made a lot of money selling an addictive, you know, product.

That did not make them business geniuses, and so they wanted to prove it other ways, and they bought businesses and fell on their face, in many cases.

Charlie, do you have any more to add on cigarette companies?

CHARLIE MUNGER: No, but I think a lot of people rise to the top in publicly-held corporations, who come up in sales or, you know, engineering, or drug development, or what have you.

It’s natural to assume once you’re sitting in the top chair that now you know pretty much everything.

Or at least, how to get wisdom out of this wonderful staff and all these outside advisors that are now available to you.

And so I think it’s very natural that perfectly terrible acquisition decisions get made, I’d say, more often than not.