Buffett Reflects on Great Businesses: Raising Prices

The following item comes via Jeff Annello:

Warren Buffett regularly points out that a business with pricing power will reign supreme over the long run. He reflected on this theme (among others) in one of his 3 lectures at Notre Dame in 1991:

I’ll try this on the students later: What’s the highest price of a daily newspaper in the United States? [Pause] [This is what he said to the students later: Most of you are familiar with it. The highest priced daily newspaper in the United States, with any circulation at all, is the Daily Racing Form. It sells about 150,000 copies a day, and it has for about 50 years, and it’s either $2.00 or $2.25 (they keep raising prices) and it’s essential. If you’re heading to the racetrack and you’ve got a choice between betting on your wife’s birthday, and Joe’s Little Green Sheet, and the Daily Racing Form, if you’re a serious racing handicapper, you want The Form.

You can charge $2.00 for The Form, you can charge $1.50, you can charge $2.50 and people are going to buy it. It’s like selling needles to addicts, basically. It’s an essential business. It will be an essential business five or 10 years from now. You have to decide whether horse racing will be around five or 10 years from now, and you have to decide whether there’s any way people will get their information about past performances of different horses from different sources.

But you’ve only got about two questions to answer, and if you answer them, you know the business will make a lot of money. The Form has huge profit margins, incidentally. Wider than any other newspaper. They charge what they want to basically. It’s an easy to understand business – so easy to understand.

Link to the Transcript (.pdf)

Again, in 1998 as he lectured students of the University of Florida, Buffett riffed on the brand and pricing power of his favorite purchase - See’s Candies:

When we looked at that business—basically, my partner, Charlie, and I: we needed to decide if there was some untapped pricing power there. Where that $1.95 box of candy could sell for $2 to $2.25. If it could sell for $2.25 or another $0.30 per pound that was $4.8 on 16 million pounds. Which on a $25 million purchase price was fine. We never hired a consultant in our lives; our idea of consulting was to go out and buy a box of candy and eat it. What we did know was that they had share of mind in California. There was something special. Every person in Ca. has something in mind about See’s Candy and overwhelmingly it was favorable. They had taken a box on Valentine’s Day to some girl and she had kissed him.

If she slapped him, we would have no business. As long as she kisses him, that is what we want in their minds. See’s Candy means getting kissed. If we can get that in the minds of people, we can raise prices. I bought it in 1972, and every year I have raised prices on Dec. 26th, the day after Christmas, because we sell a lot on Christmas. In fact, we will make $60 million this year. We will make $2 per pound on 30 million pounds. Same business, same formulas, same everything--$60 million bucks and it still doesn’t take any capital.

Link to the Transcript (.pdf)

Thanks Go to Whitney Tilson for the hosting the transcript links.

Comments

[Nick Gogerty:]

Behavioral and belief based moats are nice and slow to change.

2008 May 16 08:24 AM

[deaverb:]

Pricing power says so much. Few companies really have it: Coke, McDonalds, Walmart, Kraft, P & G don't have it. They have a modest form of it which is if their prices are equal to the other guys, they win. That, in and of itself, is a big thing. So when you score the additional benefit of "pricing" power you really "have" something. Rare as hen's teeth--and Buffett usually gets there first!

2008 May 16 09:04 AM

[Stephen Ros...:]

Apple has it.

2008 May 16 02:57 PM

[bearfund:]

Pricing power is a wonderful thing, and in places like Brazil and China where people have real wealth, it would be a powerful attraction. But in poor countries like America, I'll stick with commodities. Nobody there has any pricing power, but you can have all the pricing power in the world over your candy or your white plastic computers and it won't do you a bit of good if your potential customer just maxed out his credit card buying a loaf of bread and a tankful of heating oil.

2008 May 17 12:08 AM

[mkreisel:]

Apple is too prone to disruption. There are just too many smart people armed with billions in that business. Its R&D has to keep churning out great stuffs in order to stay ahead, and that's tough.

Coke can keep selling the same bottled sugar water for the next 100 years, without the need for R&D. In fact, its customers do NOT want change, as demonstrated by the "New Coke" debacle in 1985.

The ultimate pricing power, however, resides with cigarette companies. Addicts are always the most loyal customers.

2008 May 18 03:07 AM

[mkreisel:]

Bearfund, you apparently don't know that it's the Chinese who are maxed out on their food purchases.

Since America is the largest agriculture producer in the world, we CONTROL what other people pay for grains and meat.

2008 May 18 03:10 AM

[guliamo:]

well.. that's a very 60's way of looking at things my dear Warren.. fact is Apple stock is through the roof and has been for 5 years where as Coca Cola have been doing.. well.. nothing... old school thought from an old generation.. and don't forget the Apple brand is stronger than coca cola!



On May 18 03:07 AM mkreisel wrote:

> Apple is too prone to disruption. There are just too many smart people
> armed with billions in that business. Its R&D has to keep churning
> out great stuffs in order to stay ahead, and that's tough.
>
> Coke can keep selling the same bottled sugar water for the next 100
> years, without the need for R&D. In fact, its customers do NOT want
> change, as demonstrated by the "New Coke" debacle in 1985.
>
> The ultimate pricing power, however, resides with cigarette companies.
> Addicts are always the most loyal customers.

2008 May 18 10:46 AM