1.3 / 23 is less than 6 percent ROI, and buffet thinks this is a good investment. Granted, they may think the business can be streamlined, but I still think this says a lot about the capital glut that's driving down returns.
Ps: Most of this deal is financed with debt, so there buying 6% ROI with debt.
Berkshire Hathaway's biggest problem is finding productive investments on the scale of the cash they generate. There insurance float provides them with what is essentially interest free loans if they estimates losses well.
Understanding value investing might be nice if you want to attract VC interest in your start up , taken that most start ups are bought by other companies and don't go IPO (if they don't fail)it might be interesting to understand the fundamentals ...
Value investing and venture capital are about as different as investment strategies could be. Value investors don't usually companies that don't pay regular dividend streams, most tech companies (let alone start-ups) never pay revenue.
Over the last few months I've been noticing a lot of adverts for Heinz products on the radio. They go like this:
"When I was younger dad would take us out for fish and chips. We'd walk along the canal and feed the ducks, even in the rain. Then I'd unwrap the bag, with the steam rising, and squirt on a dollop of ketchup. And, like always, it has to be Heinz."
I'm always amazed at the ability of brands to sell £0.20 products for £2.00, and the supermarkets who then sell £0.16 products for £1.00 and claim it's value.
I worked for Lucozade (UK Gatorade) for a while. Our total cost, delivered to retailer, of a bottle was 12p. We sold it to them for min 50p and they sold it for at least £1.
Ultimately this is a bet on the longevity of consumer brands, which I think is probably a wise one.
living in the town where Heinz was founded (Pittsburgh, PA) brand loyalty can get a little over the top, we look down on anyplace that doesn't have Heinz ketchup, and years ago when I live in the bay area, I chastised a restaurant because i knew (I just knew!) they watered down the ketchup. Come on, I'm from Pittsburgh, I know my Heinz
I suppose one interesting thing about brands (or perhaps just Heinz) is that we assume they're local. I would have said Heinz was a British company, no question. Likewise with Kelloggs.
well, we can't get spotted dick here (really we can if you look hard enough(also, i only take pictures of the can to send to friends)), but heinz was founded in Pittsburgh.
Spot on. Those figures make me shiver. Branding is just not worth it on food when you know about the details.
Small rant: I stopped buying brands years ago, avoid supermarkets like the plague and don't buy ready meals. Instead I purchase from wholesalers in bulk and grow a few expensive things (chillis, peppers, tomatoes, herbs etc). Granted I have to buy beans in 2kg tins and pasta by the 5kg bag from the wholesaler but my food bill for 2 adults and 3 children is around £200/month and we eat proper freshly cooked meals every day.
:) I don't mind eating horse as long as it has a good taste.
Having grown in a place with very good beef, I am very picky for beef. When I buy a steak I prefer to pay a little more. It is not that expensive considering I am only one person.
Horse is great meat - you can't get it intentionally here in the UK any more, well I can't find it. My grandmother used to get it in her war rations. Last time I was in Calais, we found a place that did horse and chips :)
+1 for steak. I quite happily used to blow £15 on a good steak.
Problem is the ready meals taste like shit and as recently discovered, you have no idea what mammal they've chopped up in it (even the high end M&S and Waitrose ones).
You can cook well for one using the same method as I use. You just need a freezer :)
growing your own is a form of therapy as well - a context switch from technology and fast paced lifestyle.
You're looking at the cost of production, and then the price and assuming that all of the space between the two is profit, and seem to be implying that somehow it is a ripoff.
What you're not considering is the value to the customer.
The incremental cost of a copy of Microsoft Office (with electronic delivery they cut out virtually all of their manufacturing cost) is close to zero. Probably 12p as well.
Yet Microsoft sells that Office Suite for $99 or much much more.
If the value of one copy of that office suite to a company is $10,000 in improved efficiency (eg: salaries saved by not having to pay overtime or hire as many people-- remember when spreadsheets were physical sheets of paper and companies had staffs of dozens of women whose sole job was to type up correspondence on typewriters?) then they are "profiting" even more than Microsoft is because the spread is wider.
Further, manufacturing costs are only one part of the costs of a product. Yes there's marketing, and advertising which you may hate, but there's also the offices that house the workers that run the company, the royalties paid to people who generate formulations, the taxes paid to the government, the manifold fees, costs, and expenses involved in running a business. All of these raise the actual "cost" from above the 12p manufacturing (and delivery costs I assume you included.)
For me, the value of buying a brand that has reliable quality control is often pretty high.
If a high quality bottle of ketchup elevates the satisfaction of an inexpensive meal (say fish & chips) to the point where it is on par with a much more expensive meal, like those workers using office, I may be getting more "profit" out of the transaction than the company.
This is how I use ketchup. It means I eat out less, and spend less on food and have a higher quality of life.
Ketchup is a physical product with raw material costs which requires physical storage and delivery, and must be distributed through intermediaries. It also has a shelf life, and ingredients that fluctuate in price seasonally. Your comparison is about as sensical as me complaining I can't type an essay using 100 bottles of ketchup.
However, my points are that a) we routinely pay 10x the 'value' of food products, and b) supermarkets piggy back off our conditioning by brands to offer us 'value' products which still cost 8x what they are worth without any of the advertising/marketing overhead.
The parallel would be if Macbook Airs were being made and delivered to Apple stores for $100, or cars were delivered to dealers at a cost of $2,000 and then sold to you for $20,000.
You keep talking about the 'value' of products and what they're 'worth'.
Things are worth what people will pay for them. As nirvana pointed out, looking at only the marginal production cost of something is highly misleading. Heinz makes about 36% gross margins [1], which is certainly good, but it's not as if they're seeing the 'value' of that '10x' markup. And lest you think the rest of their cost is advertising to fool people into spending too much on ketchup, their total marketing (not just ads) budget is only a few hundred million[2] (at least as of 2006) vs total revenue of over $10B.
Of course not. Had you known it was a forgery, you wouldn't have spent $50 million. That would apply just as well to buying a bottle of Heinz ketchup tainted with rat poison.
But people know what's in Heinz. They know what it tastes like. They keep buying it at the price Heinz and their grocer charges.
It means, at the time you bought, you thought the painting was worth $50 million. Later, when you discover it's not, you'll be less likely to buy anything else from that art dealer. Same as anything else in life. People keep buying ketchup because ketchup remains valuable to them, even at $2 a bottle.
Heinz ketchup is worth it to me because it tastes like Heinz ketchup. They could sale the off brand for $0.01 and I still wouldn't buy it. I'm not going to go broke by buying a $3 bottle of ketchup that will last me months.
The other food that I will only buy one brand is Kraft Mac & Cheese. I know the stuff is nasty. I know it's bad for me. But, damn it that's what boxed Mac & Cheese is suppose to taste like.
How much a person will pay for something determines its "value" to them. If a person will pay $10 for a bottle of ketchup, then it doesn't matter what the production cost was, the value they received was at least $10.
Well the alternative is to make it yourself. If there's no one else selling it for what you perceive the value to be, then you have to do it. The question is, how much will it cost you to make ketchup yourself, in both dollars and in time? And then ask yourself is it worth the time and money to make it yourself, or do you get more value from buying it at the store?
For 99% of consumers, $2 is a value because it's less expensive than making it themselves. It doesn't matter how much it cost Heinz to make.
The OP is assuming it is a ripoff because you can buy other producers ketchup for half the price of "brand-name" Heinz ketchup. I doubt many people would tell the difference between Heinz and something else in a double-blind test. And if they can it is because the better tasting ketchup contains more sugar which anyway is bad. Same thing with jeans, you cant see the difference (unless they have the brand printed on them) so buying Levi's is a waste of money.
You act as if the only difference in high quality clothing is the looks, instead of considering that they may be much more comfortable to wear. People close to me have also admitted that wearing brand name clothing provides them with confidence in social situations that they wouldn't otherwise have. I think it's rather unfair to disregard brand names just because of looks.
I'm guessing that you'd be surprised by the number of people that would be able to pick out the Heinz ketchup in a double blind test. I know people that refuse the ketchup at McDonalds specifically because it's not Heinz.
and many more taste tests. Not to say that not many people honestly prefer Heinz ketchup, but there seem to be no empirical evidence proving that Heinz would be the "best" ketchup.
Not all jeans, even within a brand are created equal. Levi's quality varies greatly between product lines. The jeans they sell at Kohl's for $35 and the ones they sell at their own stores are completely different products. I own a couple pairs of Levi's Commuter jeans/pants and as a daily bike commuter in Portland they've definitely been worth the price difference. There's far more to clothing than how it looks.
> remember when spreadsheets were physical sheets of paper and companies had staffs of dozens of women whose sole job was to type up correspondence on typewriters?
Back in the 60's before I was around, my mum worked in the accounting department of a mid-sized car dealer. Her job title was "Computer" because she'd update their books by hand. Later on they got the first electronic desktop calculator in the city and the local paper came by to do a story on this modern marvel.
> I worked for Lucozade (UK Gatorade) for a while. Our total cost, delivered to retailer, of a bottle was 12p. We sold it to them for min 50p and they sold it for at least £1.
FMCG goods have typically awful margins on them for retailers. A 50p markup sounds good, but consider that out of that 50p the retailer has to cover transportation costs, salaries, cost of display, cost of retail space, etc. Supermarkets are not exactly raking in profit.
And it's not such a rosy picture for the brand manufacturers either. The 20p raw cost of supplying the bottle of Lucozade doesn't include advertising expenses, which for branded products tend to be substantial (after all, that's how they become brands in the first place).
Lucozade's parent company, GSK, makes a lot of money, but nearly all of that money comes from bio-tech and pharma. They don't make nearly as much money from Lucozade, and there was actually a story a week ago that they're trying to offload the brand[1].
> "When I was younger dad would take us out for fish and chips. We'd walk along the canal and feed the ducks, even in the rain. Then I'd unwrap the bag, with the steam rising, and squirt on a dollop of ketchup. And, like always, it has to be Heinz."
I've heard stories that Heinz is so defensive of their brand that they send out "Ketchup Inspectors" to make sure restaurants aren't refilling Heinz bottles with lesser ketchup. This is the only somewhat legitimate source that I could find: http://www.freerepublic.com/focus/f-news/1067133/posts
Why shouldn't they? Heinz ketchup has a specific flavor profile. If a restaurant is filling Heinz bottles with a different ketchup the consumer could be lead to believe that Heinz is changing their flavor and may never buy it again.
I don't even like ketchup and I could pick out Heinz in a blind taste test.
What's the penalty if you get caught? Restaurants usually just say it's "ketchup" without mentioning that it's Heinz. What can Heinz actually do to you if you buy a bottle of their stuff and fill it with something else?
Well that's the interesting thing, I'd imagine that there is some kind of penalty but I have no idea what. Misrepresentation of a food product to consumers? Maybe. It's tenuous, but I'd imagine it's very possible for them to spin it like that.
> If you're using Heinz' trademark to sell a different product they can sue you easy.
No. If you're using the Heinz trademark in such a way as to confuse and mislead the public, then they can sue you. Otherwise probably not.
Consider the example of Apple Computer and Apple Music (once owned by the Beatles). Two businesses, no conflict, so no lawsuit.
Once Sun Computer threatened to sue me because I had a Web page named "Sun Computer" (the page computed the position of the sun: http://www.arachnoid.com/lutusp/sunrise/). My argument was that I wasn't trying to confuse the public, and my use of the word "sun" was legitimate because it referred to the astronomical object by that name. Their objection was that my use of "Sun Computer" as a page name caused my page to appear above theirs in the Google search listings.
I decided their position had merit, and I renamed the page. My point is that it is all about the degree to which use of a trademark or trademarked name would confuse the public and hurt someone's business, not use of a trademark per se.
The different product the parent mentioned is still ketchup. The scenario is replacing the ketchup in a Heinz bottle with ketchup from another brand, not selling "Heinz Cola" or something.
My post showed that the OP was wrong -- it showed that using a trademarked name is not in and of itself actionable. There has to be a basis for action apart from the simple fact that the names are the same.
71 comments
[ 3.7 ms ] story [ 151 ms ] threadPs: Most of this deal is financed with debt, so there buying 6% ROI with debt.
Low risk, low volatility 6% ROI isn't a bad investment at all, but I think smart money is on Buffett having an idea or two for increasing that number.
this one if brand identity for sure
"When I was younger dad would take us out for fish and chips. We'd walk along the canal and feed the ducks, even in the rain. Then I'd unwrap the bag, with the steam rising, and squirt on a dollop of ketchup. And, like always, it has to be Heinz."
I'm always amazed at the ability of brands to sell £0.20 products for £2.00, and the supermarkets who then sell £0.16 products for £1.00 and claim it's value.
I worked for Lucozade (UK Gatorade) for a while. Our total cost, delivered to retailer, of a bottle was 12p. We sold it to them for min 50p and they sold it for at least £1.
Ultimately this is a bet on the longevity of consumer brands, which I think is probably a wise one.
(I agree about the Britishness of Heinz and Kelloggs. It's only in the past ten years that I realised they weren't.)
https://en.wikipedia.org/wiki/H._J._Heinz_Company
http://en.wikipedia.org/wiki/Hawthornden_Castle
Small rant: I stopped buying brands years ago, avoid supermarkets like the plague and don't buy ready meals. Instead I purchase from wholesalers in bulk and grow a few expensive things (chillis, peppers, tomatoes, herbs etc). Granted I have to buy beans in 2kg tins and pasta by the 5kg bag from the wholesaler but my food bill for 2 adults and 3 children is around £200/month and we eat proper freshly cooked meals every day.
For me, I think it is cheaper just to buy at the super market and buy ready meals.
Having grown in a place with very good beef, I am very picky for beef. When I buy a steak I prefer to pay a little more. It is not that expensive considering I am only one person.
+1 for steak. I quite happily used to blow £15 on a good steak.
Of course, you can't amortise the labour of cooking over as many people, so it may still make sense to get the ready meals from that perspective.
You can cook well for one using the same method as I use. You just need a freezer :)
growing your own is a form of therapy as well - a context switch from technology and fast paced lifestyle.
What you're not considering is the value to the customer.
The incremental cost of a copy of Microsoft Office (with electronic delivery they cut out virtually all of their manufacturing cost) is close to zero. Probably 12p as well.
Yet Microsoft sells that Office Suite for $99 or much much more.
If the value of one copy of that office suite to a company is $10,000 in improved efficiency (eg: salaries saved by not having to pay overtime or hire as many people-- remember when spreadsheets were physical sheets of paper and companies had staffs of dozens of women whose sole job was to type up correspondence on typewriters?) then they are "profiting" even more than Microsoft is because the spread is wider.
Further, manufacturing costs are only one part of the costs of a product. Yes there's marketing, and advertising which you may hate, but there's also the offices that house the workers that run the company, the royalties paid to people who generate formulations, the taxes paid to the government, the manifold fees, costs, and expenses involved in running a business. All of these raise the actual "cost" from above the 12p manufacturing (and delivery costs I assume you included.)
For me, the value of buying a brand that has reliable quality control is often pretty high.
If a high quality bottle of ketchup elevates the satisfaction of an inexpensive meal (say fish & chips) to the point where it is on par with a much more expensive meal, like those workers using office, I may be getting more "profit" out of the transaction than the company.
This is how I use ketchup. It means I eat out less, and spend less on food and have a higher quality of life.
However, my points are that a) we routinely pay 10x the 'value' of food products, and b) supermarkets piggy back off our conditioning by brands to offer us 'value' products which still cost 8x what they are worth without any of the advertising/marketing overhead.
The parallel would be if Macbook Airs were being made and delivered to Apple stores for $100, or cars were delivered to dealers at a cost of $2,000 and then sold to you for $20,000.
Things are worth what people will pay for them. As nirvana pointed out, looking at only the marginal production cost of something is highly misleading. Heinz makes about 36% gross margins [1], which is certainly good, but it's not as if they're seeing the 'value' of that '10x' markup. And lest you think the rest of their cost is advertising to fool people into spending too much on ketchup, their total marketing (not just ads) budget is only a few hundred million[2] (at least as of 2006) vs total revenue of over $10B.
[1] http://ycharts.com/companies/HNZ/gross_profit_margin
[2] http://adage.com/article/news/heinz-ceo-boost-ad-spend-proxy...
But people know what's in Heinz. They know what it tastes like. They keep buying it at the price Heinz and their grocer charges.
The other food that I will only buy one brand is Kraft Mac & Cheese. I know the stuff is nasty. I know it's bad for me. But, damn it that's what boxed Mac & Cheese is suppose to taste like.
How much a person will pay for something determines its "value" to them. If a person will pay $10 for a bottle of ketchup, then it doesn't matter what the production cost was, the value they received was at least $10.
For 99% of consumers, $2 is a value because it's less expensive than making it themselves. It doesn't matter how much it cost Heinz to make.
http://www.seriouseats.com/2012/10/taste-test-the-best-ketch... http://lenpenzo.com/blog/id1481-ketchup-taste-test.html http://www.huffingtonpost.com/2011/09/13/the-best-ketchup_n_... http://www.dailymail.co.uk/news/article-1387285/Red-faced-He...
and many more taste tests. Not to say that not many people honestly prefer Heinz ketchup, but there seem to be no empirical evidence proving that Heinz would be the "best" ketchup.
Back in the 60's before I was around, my mum worked in the accounting department of a mid-sized car dealer. Her job title was "Computer" because she'd update their books by hand. Later on they got the first electronic desktop calculator in the city and the local paper came by to do a story on this modern marvel.
FMCG goods have typically awful margins on them for retailers. A 50p markup sounds good, but consider that out of that 50p the retailer has to cover transportation costs, salaries, cost of display, cost of retail space, etc. Supermarkets are not exactly raking in profit.
And it's not such a rosy picture for the brand manufacturers either. The 20p raw cost of supplying the bottle of Lucozade doesn't include advertising expenses, which for branded products tend to be substantial (after all, that's how they become brands in the first place).
Lucozade's parent company, GSK, makes a lot of money, but nearly all of that money comes from bio-tech and pharma. They don't make nearly as much money from Lucozade, and there was actually a story a week ago that they're trying to offload the brand[1].
[1]:http://www.thisismoney.co.uk/money/markets/article-2274545/G...
Pedantics are not making a distinction between price and value.
To illustrate: how many eggs would you barter for a bottle of ketchup? Barter, as in there is no price signal.
Reminds me a great scene from Mad Men http://www.youtube.com/watch?v=suRDUFpsHus
I don't even like ketchup and I could pick out Heinz in a blind taste test.
No. If you're using the Heinz trademark in such a way as to confuse and mislead the public, then they can sue you. Otherwise probably not.
Consider the example of Apple Computer and Apple Music (once owned by the Beatles). Two businesses, no conflict, so no lawsuit.
Once Sun Computer threatened to sue me because I had a Web page named "Sun Computer" (the page computed the position of the sun: http://www.arachnoid.com/lutusp/sunrise/). My argument was that I wasn't trying to confuse the public, and my use of the word "sun" was legitimate because it referred to the astronomical object by that name. Their objection was that my use of "Sun Computer" as a page name caused my page to appear above theirs in the Google search listings.
I decided their position had merit, and I renamed the page. My point is that it is all about the degree to which use of a trademark or trademarked name would confuse the public and hurt someone's business, not use of a trademark per se.
https://www.youtube.com/watch?v=Yz6FudM0zKk
They have full-time tasters who are amongst the only 8 people to know the full recipe.