2019: Does Kraft still have a moat?
AUDIENCE MEMBER: Hello Warren and Charlie. Consumer tastes are changing. I think if we asked how many people here in the arena have eaten Velveeta cheese in the last year or so, there’d be only a small handful, maybe more for Jell-O.
3G’s playbook of cutting R&D looks to have stifled new product development amidst changing preferences.
So, here’s my question. Why continue to hold when the moat appears to be dry? Or do you think it is filling back up?
CHARLIE MUNGER: Well, I don’t think the problem was that they cut research or something. I think the problem was, they paid a little too much for the last acquisition.
WARREN BUFFETT: That Jell-O — I can’t give you the exact figures. There are certain brands that may be declining 2 percent a year or 3 percent a year in unit sales, and there’s others that are growing 1 or 2 percent. There’s not dramatic changes taking place at all. I mean, Kraft Heinz is earning more money than Kraft and Heinz were earning six or seven years ago.
I mean, and the products are being used in a huge way. Now it’s true that certain — that there are always trends going to some degree, but they have not fallen apart, remotely. And they have widened the margin somewhat.
But it is tougher, in terms of the margin and the price negotiations, probably to go through to the actual consumer. It’s become a somewhat tougher passageway for all food companies, than it was ten years ago. It’s still a terrific business.
I mean, you know, you mentioned Jell-O or Velveeta. Charlie worked at my grandfather’s grocery store in 1940, I worked there in ’41. And they were buying those products then, and they buy the products now. The margins are still very good. They earn terrific returns on invested capital. But we paid too much in the case of Kraft.
You can pay too much for a growing brand. I mean, you can pay way too much for a growing brand, probably be easier to be sucked into that. So, I basically don’t worry about the brands.
A certain number are very strong, and a certain number are declining a bit. But that was the case 10 years ago. It’ll be the case 10 years from now. There’s nothing dramatic happening in that.