Saturday, 25 February 2012
What Warren Buffett says about Non-Commodity (Franchise) Companies
Warren Buffett prefers to invest in non-commodity companies - companies whose products or services are unique or special in some way.
Here customers either need the product, or there is no real competitor, or the reputation of the product is such that people will keep buying it. Suppliers and distributors have no choice but to stock the product or people will go elsewhere.
Generally, but not always, either the product will be a brand name (eg Coke, Gillette), the company will be a brand name (H & R Block) or the company will be in a monopoly situation or monopolistic cartel.
Warren Buffett illustrated this difference in 1982:
‘[There is the] constant struggle of every vendor to establish special qualities of product or services. This works with candy bars (customers buy by brand name, not by asking for a "two-ounce candy bar") but doesn't work with sugar (how often do you hear, "I’ll have a cup of coffee with cream and C & H sugar, please").’