Recently, there was some speculation about whether or not Warren Buffet’s company Berkshire Hathaway would purchase a large interest in Kellogg – the cereals company.While it seems like the brand would fit in with other American brands like Coca-Cola, Buffet’s partner Charlie Munger would die before he let his company purchase stock in Kellogg. Why? Here’s an excerpt from a 1994 speech Munger gave:
And maybe the cereal makers by and large have learned to be less crazy about fighting for market share—because if you get even one person who’s hell-bent on gaining market share…. For example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I’d ruin Kellogg in the process. But I think I could do it.
Munger felt that cereals had a problem with being “commoditized” – which means that there is no real brand recognition or brand loyalty in the world of cereals.
A great article on the Motley Fool website explained it this way:
It’s in the last paragraph that I think Munger really hits on the reason why Berkshire Hathaway wouldn’t own Kellogg, or any cereal business, for that matter. The product is so commoditized, and consumers are so price sensitive, that one bad actor in the industry could ruin the profits for everyone.
“A bet on Kellogg is also a bet on General Mills and the many private-label brands in existence. Once one industry player shoots for market share, rational pricing goes out the window. Declining profits would follow.”
A lot of investors seem to follow the example and thought process of Warren Buffet and Charlie Munger. So should you be a contrarian and buy up as much Kellogg stock as you can? Or should you listen to the “Oracle of Omaha” and his right-hand man and stay away from a bad business model?
The choice is yours.
For a full text of Charlie Munger’s 1994 speech, click here.