Wednesday, April 7, 2010

On Buffett and Coca-Cola (KO)

Buffett's enthusiasm for Coca-Cola (KO) has always bothered me:

Coke is now getting a royalty on swallows; probably 7.2 billion a day if the average gulp is one ounce. I feel 100% sure (perhaps mistakenly) that I know the odds of this continuing- again 100% as long a cola doesn’t cause cancer.
One-hundred percent is too high. Everything comes to an end eventually. There's lots of evidence of an association between sugar generally, and sugar-sweetened soft drinks specifically, and obesity and type 2 diabetes. Health concerns are even listed as a risk factor in the Coca-Cola annual report!
Obesity and other health concerns may reduce demand for some of our products.
Consumers, public health officials and government officials are becoming increasingly concerned about the public health consequences associated with obesity, particularly among young people. In addition, some researchers, health advocates and dietary guidelines are encouraging consumers to reduce consumption of sugar-sweetened beverages, including those sweetened with HFCS or other nutritive sweeteners. Increasing public concern about these issues; possible new taxes and governmental regulations concerning the marketing, labeling or availability of our beverages; and negative publicity resulting from actual or threatened legal actions against us or other companies in our industry relating to the marketing, labeling or sale of sugar-sweetened beverages may reduce demand for our beverages, which could affect our profitability.
What happens to Coca-Cola if more people switch to paleolithic diets?

Coca-Cola has also been known to file amicus briefs in politically sensitive cases. And, like another one of Berkshire's operations, GEICO, they spent massive amounts on advertising - $2.79 billion in 2009. You have to understand that media's real customers are advertisers, not readers. Advertisers underwrite most of the media produced in this country.

I don't see why you would be enthusiastic about owning KO at today's price. I would also be long Charlie Munger and short Warren Buffett.

I wonder if Buffett is ever tempted to walk away and start over with a $100 million fund, where you can do real value investing on smaller situations? What kind of terms do you think he could get from investors?

No comments: