Friday, 13 April 2012

Warren Buffett - What is Franchise Value?

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There is much less difference between buying a whole company and buying shares of a company. One difference is that you can change the managers much easier. But if you have to change the managers, then it probably isn't a business that you want to be in anyway. Another advantage to owning 100% is that you can decide how to allocate the excess capital. You can't do that if you only own 5%. At Berkshire, the game is to try to figure out where to put capital. 

Most managers like to grow. They prefer to grow intelligently, but if they can't do that they will try other methods. In the banking industry, they measure themselves by size of their balance sheets, not by profits. Banks don't necessarily have economies of scale beyond a certain point. It is much better to have a large competitive advantage in a smaller market. There isn't much advantage to shareholders for the banks that they own to expand. 

Gillette makes about 2/3 of its money outside of the United States. Companies that can do well in international markets are great. Depending on the different countries they are in, there are many factors that can be better or worse because of tax rates or public opinion. A good business can be found anywhere, but it is easier in the United States if you understand the economy and the business landscape a bit better. 

Franchise value is what a brand has if a customer will leave a store if they don't carry the brand. They would rather walk across the street and pay a nickle more than to buy another brand. That is franchise value, and it is very valuable. It is wholly in the customer's mind. If you've got the right product in that way, you may be paying for taste or something else. The second thing to think about is how durable that franchise value is.

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