Economic franchise examples – Buffett and Munger’s favourites

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At the Berkshire Hathaway Meeting three weeks ago Warren and Charlie were asked “how you go about attempting to forecast the degree of future success of one specific product in a good business versus another, such that you invest in American Express and Coca-Cola rather than Diners Club or RC Cola, for example.”

I think their answers are instructive to those of us who spend time trying to evaluate the strength of economic franchises.

Warren pointed out that American Express was not the first to market.  That honour belongs to Diners Club.  But American Express created something valuable in the mind of the card holder, a sense of elitism. Despite American Express charging more people wanted to use it because,

“if you were a salesperson out with somebody, and you could pull out that American Express card with that centurion, you looked you were JP Morgan. And if you pulled out the Diners Club, it had a whole bunch of flashy symbols, you looked like a guy that was kiting his checks from one month to the next”

Always remember: Many franchises are all in the mind of the consumer.

“American Express had this huge salad oil scandal in 1963. And there was really worry about whether the company would survive.  But nobody quit using the card. Nobody quit using the traveler’s checks. And they charged a premium price for their traveler’s checks. So there are things you can see around consumer products that sometimes can give you a pretty good insight into the future. And then sometimes we make mistakes.”

Cola, Candy and the iPhone

In the nineteenth century there were all sorts of colas, but Coke Cola is “The real thing” in people’s minds therefore it can charge a premium and make returns on capital employed.

See’s Candy can charge a premium because of what goes on in the customer’s mind: “Look at See’s Candy, you know, if you live in California and you were a teenage boy, and you went to your girlfriend’s house and you gave the box of candy to her or to her mother or father and she kissed you, you know, you lose price sensitivity at that point. So……

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