The Kraft Heinz Company boasted an $80 billion market capitalization at its merger debut in 2015, yet a decade later, its value has shrunk to approximately $30 billion. A company's moat is not static. As new retail channels like Amazon.com and Costco capture increasing market share with low prices and high quality, the moats of many long-dominant consumer goods companies are narrowing and shallowing.
Although Warren Buffett has not sold his stake in Kraft Heinz, his two massive impairment charges totaling $18 billion speak volumes about his assessment. When is the right time to sell a company? Buffett's answer is that he does not sell stocks simply because he has held them for a long time or realized substantial profits; instead, he sells securities when a company's fundamentals deteriorate.
Beware of the narrowing moat. Historically, the consumer goods sector has been fertile ground for long-term bull stocks in capital markets. However, in recent years, the rise of new retail channels has squeezed both the resilience of consumer brands and the width of their protective moats.
Reflecting in 2017, Buffett noted that large retailers like Walmart, Amazon.com, and Costco were growing increasingly powerful. Their high-quality, low-cost private-label brands severely compressed the生存空间 and bargaining power of traditional brand manufacturers like Kraft Heinz. Consumer loyalty to established brands is declining, with shoppers more willing to try new, value-for-money products. This shift in retail channel power has eroded the once-stable market position of Kraft Heinz.
John M. Gorlow, in "Buffett's Financial Lessons," used the term "retail apocalypse" to describe the slew of companies that went bankrupt failing to compete with Amazon and Walmart, including Toys "R" Us and Gymboree.
Indeed, on the shelves of supermarkets like Costco, Walmart, Hema, and 7Fresh in recent years, investors can easily observe that retail giants' private labels now encompass beverages, condiments, meat products, milk, cereal, paper towels, toothpaste, and other daily consumer goods, significantly impacting traditional manufacturers.
A moat is not permanent. When Pang Donglai's "Little Sugar Cube" rings became a sensation at prices as low as 200 yuan, lab-grown diamonds squeezed the value of De Beers, long the monopolist of "the diamond on the crown." When digital photography gained popularity, the business foundation of Kodak changed fundamentally. As mobile internet became reality, feature phones began their retreat. With the rise of new energy vehicles, traditional automotive empires are being shaken.
When to Sell? So when should an investor sell? Some investors use the concept of "profit-taking," suggesting selling after a gain. But Buffett disagrees: "Perhaps the most famous - and most fatuous - of Wall Street adages is 'You can't go broke taking a profit.'" Buffett argues that one should not sell merely because an asset's price has increased, especially when holding companies with strong pricing power.
In his 1987 letter to Berkshire Hathaway shareholders, Buffett elaborated more precisely on when to sell: "We need to emphasize, however, that we do not sell holdings just because they have appreciated or because we have held them for a long time. We are quite content to hold any security indefinitely, as long as the prospective return on equity capital of the business is satisfactory, management is competent and honest, and the market does not overvalue the business."
Buffett sells when a company's fundamentals deteriorate, and sometimes he sells to raise capital for another investment he believes has greater upside potential. For instance, in 2017, Buffett sold his stake in IBM and used part of the proceeds to increase his holdings in Apple—a swap that has, to date, yielded massive returns for Berkshire.
While Buffett indeed enters investments with the wish to hold them permanently, he adapts when the moat changes. For example, although he earned over a hundredfold profit from his investment in The Washington Post, holding it for nearly 40 years, his assessment of the newspaper industry evolved from optimism to pessimism.
In his 1991 shareholder letter, he stated: "The media businesses... will prove considerably less marvelous than I, the industry, or lenders thought would be the case only a few years ago." By 2007, he added: "Some publishers... will be unhappy about my assessment. And, sure, there will still be some people who will buy these properties, thinking they are an unbreakable slot machine. In fact, many smart newspaper managers... saw what was happening to them, either ignored it or pretended it didn't matter."
In 2014, Buffett exited his stake in The Washington Post's parent company through an asset spin-off transaction.
The Irreplaceable Companies Former Harvard economist Clayton Christensen applied Schumpeter's theories to the rapidly evolving tech sector. Christensen used the terms "disruptive technology" or "disruptive innovation" to describe products or services that are better, faster, or cheaper, enabling companies to potentially overtake current market leaders.
Consumer goods companies with low barriers to entry and high profit margins are easily targeted for disruption by new retail channels; your profit becomes an opportunity in others' eyes. However, companies possessing unique, proprietary advantages are not easily disrupted. For example, The Coca-Cola Company, with its secret formula, has not become a primary target for retail giants.
In the case of Coca-Cola, which Buffett began buying in 1988, he has held the stock for over 37 years. His initial investment of $1.3 billion has generated profits exceeding tens of billions of dollars, yet he has never considered selling simply due to excessive gains or the long holding period.
Starting from Moody's IPO in 2001, Buffett purchased shares, initially investing around $500 million at a price-to-earnings ratio of about 15 times. Holding Moody's for over 20 years has yielded a return exceeding 30 times for Buffett. The ratings business remains Moody's primary revenue source, and its strength lies in its market credibility; once an issuing institution selects a rating company, it is reluctant to switch.
On Buffett's investment list, other hard-to-replace companies include those in oil, railroads, and utilities. These entities not only possess unique industry attributes but are also capital-intensive, with very few players globally able to operate in such sectors. They play crucial roles in the national economy, typically pricing their products based on cost-plus models, resulting in profit margins that are not exceptionally high but are extremely stable.
Comments