Good Business

By Ramesh Akkineni

from a lecture by Warren Buffett in 1991

I would say this: “If you added a penny to price of every Coca Cola sold in the world this year, that would add $2 billion to pretax earnings.” Now you tell me whether you think there’s a penny, worldwide, of price flexibility per serving of Coke. Well, the answer is “you know there is.”
When they bought the Coca Cola Company, the Candler family bought it from Pembertons back in 1904 or 1906, they paid $2,000 for the company. If the Pemberton family had reserved a penny a serving royalty a serving, the Coca Cola company would be sending $2 billion to the Pemberton family every year and you wouldn’t even see the difference in the figures. It’s there.
Now that’s not true when I was selling [men’s suit] linings [Berkshire Hathaway’s original business]. I sold men’s suit linings for 20 years. We tried to raise our price a half a cent a yard, and on an 80-cent-a-yard product, people who’d done business with us for 80 years slammed the door in our face. (garbled) ... “but half a cent a yard”... Nobody ever went into a store and said “I’d like to buy a pinstripe suit with a Hathaway lining.” Never. They say “I want a coat” all over the world.
Now in this country, Pepsi is, unfortunately, more or less coexistent with Coke. This is their weakest market. They make more in Japan, with less than half the people and way less per capita usage than they make in the United States. Around the world a guy says “I’ll sell you an unmarked cola a penny cheaper” ... it isn’t going to happen. That is the fastest test.
A couple of fast tests about how good a business is. First question is “how long does the management have to think before they decide to raise prices?” You’re looking at marvelous business when you look in the mirror and say “mirror, mirror on the wall, how much should I charge for Coke this fall?” [And the mirror replies, “More.”] That’s a great business. When you say, like we used to in the textile business, when you get down on your knees, call in all the priests, rabbis, and everyone else, [and say] “just another half cent a yard.” Then you get up and they say “We won’t pay it.” It’s just night and day. I mean, if you walk into a drugstore, and you say “I’d like a Hershey bar” and the man says “I don’t have any Hershey bars, but I’ve got this unmarked chocolate bar, and it’s a nickel cheaper than a Hershey bar” you just go across the street and buy a Hershey bar. That is a good business.
The ability to raise prices – the ability to differentiate yourself in a real way, and a real way means you can charge a different price – that makes a great business.
I’ll try this on the students later: What’s the highest price of a daily newspaper in the United States? [Pause] The highest priced daily newspaper in the United States is the Daily Racing Form. 150,000 copies a day, $2.25 a copy, they go up in 25 cent intervals, and it doesn’t affect circulation at all. Why? There is no substitute. If you go to the track, assuming you’re a forms player, you don’t want “Joe’s Little Green Sheet”, you want The Form. And it doesn’t make any difference what it costs! There is no substitute. And that’s why they’ve got a 65% pretax margin. It doesn’t take a genius to figure it out.
There are products like that, and there are products like sheet steel. And they’re night and day.

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