CAROL LOOMIS: To what extent do the changing dynamics in the consumer food market change your view on the long-term potential for Kraft Heinz?
WARREN BUFFETT: Yeah, actually, what I said was, we paid too much for Heinz — I mean Kraft — I’m sorry — the Heinz part of the transaction, when we originally owned about half of Heinz, we paid an appropriate price there. And we actually did well. We had some preferred redeemed and so on.
We paid too much money for Kraft. To some extent, our own actions had driven up the prices.
Now, Kraft Heinz, the profits of that business, 6 billion — we’ll say very, very, very roughly — I’m not projecting, I’m not making forecasts — but 6 billion pretax on 7 billion of tangible assets is a wonderful business.
But you can pay too much for a wonderful business.
We bought See’s Candy. And we made a great purchase, as it turned out. And we could’ve paid more. But there’s some price at which we could’ve bought even See’s Candy, and it wouldn’t have worked.
So, the business does not know how much you paid for it.
I mean, 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 in those operations over the way they were operating before.
But you’re quite correct that Amazon itself has become a brand. Kirkland, at Costco, is a $39 billion brand. All of Kraft Heinz is $26 billion. And it’s been around for — on the Heinz side — it’s been around for 150 years.
And it’s been advertised — billions and billions and billions of dollars, in terms of their products. And they go through tens of thousands of outlets.
And here’s somebody like Costco, establishes a brand called Kirkland. And it’s doing 39 billion, more than virtually any food company. And that brand moves from product to product, which is terrific, if a brand travels.
I mean, Coca Cola moves it from Coke to Cherry Coke and Coke Zero and so on.
But to have a brand that can really move — and Kirkland does more business than Coca Cola does. And Kirkland operates through 775 or so stores. They call them warehouses at Costco. And Coca Cola is through millions of distribution outlets.
So, brands — the retailer and the brands have always struggled as to who gets the upper hand in moving a product to the consumers.
And there’s no question, in my mind, that the position of the retailer, relative to the brands, which varies enormously around the world. In different countries, you’ve had 35 percent, even, maybe 40 percent, be private-label brands in soft drinks. And it’s never gotten anywhere close to that in the United States. So, it varies a lot.
But basically, retailers — certain retailers — the retail system — has gained some power. And particularly in the case of Amazon and Walmart and their reaction to it, and Costco — and Aldi and some others I can name — has gained in power relative to brands.
Kraft Heinz is still doing very well, operationally. But we paid too much. If we paid 50 billion, you know, it would’ve been a different business. It’d still be earning the same amount.
You can turn any investment into a bad deal by paying too much. What you can’t do is turn any investment into a good deal by paying little, which is sort of how I started out in this world.
But the idea of buying the cigar butts that are declining or poor businesses for a bargain price is not something that we try to do anymore. We try to buy good businesses at a decent price. And we made a mistake on the Kraft part of Kraft Heinz.
