The Most Important Factor for Success, According to Warren Buffett

Pricing power is a crucial aspect to consider when making investment decisions, and companies such as Coca-Cola, Apple, and Starbucks have what it takes to deliver superior returns for investors in the long term.

Mar 17, 2014 at 8:29PM

Among other extraordinary skills, Warren Buffett has a special talent for explaining important investment concepts in a simple and powerful way. Pricing power can be a central variable to consider when making investment decisions, and companies such as Coca-Cola (NYSE:KO), Apple (NASDAQ:AAPL), and Starbucks (NASDAQ:SBUX) have the pricing strength to generate consistent profitability for investors in the long term.

In Buffett's words:

The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you've got a terrible business.


Source: Coca-Cola.

Coca-Cola's sparkling brand value
Coca-Cola is not only one of Buffett´s biggest holdings, but also a paradigmatic example to understand his investment philosophy. The company's brand value, unparalleled distribution network, and abundant financial resources to invest in areas like marketing and product development provide rock-solid competitive strengths for the business, which management translates into superior profitability and consistent capital distributions for shareholders.

The Coca-Cola brand produces more than $1 billion in sales in 19 countries, and the company owns 16 other brands bringing in more than $1 billion in global revenues. Not only that, but Coca-Cola also has a pipeline of 20 more brands generating between $0.5 billion and $1 billion in global sales, many of which will probably become new billion-dollar brands in the middle term.

This level of brand differentiation allows Coca-Cola to charge for its products a substantial premium over generic competitors, which produces superior profitability for shareholders.

Coca-Cola has a gross profit margin of more than 60%, and operating margin is in the area of 22% of sales. By comparison, generic competitor Cott (NYSE:COT) has a gross margin of 12% and an operating margin of only 4%, since it lacks Coca-Cola´s competitive strengths and the pricing power that comes with them.

Captura De Pantalla

Source: Apple.

Apple doesn't care about market share
Apple is the most valuable brand in the world, according to Interbrand. The company is losing market share against cheaper smartphones and tablets operating with Android in emerging markets, where Apple products are too expensive for many consumers and carriers don't usually subsidize the price of the devices as much as in the United States.

But Apple is not about market share. The company is focused on creating high-quality products supported by a deep ecosystem and providing a superior experience for customers, and Apple customers seem to be more than willing to pay premium prices for its products.

According to CEO Tim Cook in the company's latest press conference:

iPhone customers are loving their phones, and continue to produce the highest loyalty rates in the industry. A December survey of U.S. customers by ChangeWave indicated a 96% customer satisfaction rate for iPhone. And based on the latest data provided by Kantar, iPhone customers have a 90% loyalty rate, significantly higher than the competition.

The company will need to reinvigorate product innovation to accelerate growth, but Apple's profitability is not in question, as the company has an operating margin above 28% of sales and generated more than $22.6 billion in operating cash flows during the last quarter alone.

Starbucks Image

Source: Starbucks.

Starbucks sells much more than coffee
Starbucks sells much more than just coffee. The company provides, first and foremost, a differentiated customer experience supported by one of the most valuable brands in the consumer sector.

A comfortable environment providing a third place between work and home, personalized customer attention, and a dynamic policy of permanent innovation are big differentiators for the company, and this means higher prices for Starbucks versus the competition.

Management is moving in the right direction by broadening the company's product offerings with new drinks and food products in order to increase sales and attract a broader customer base in a cost-efficient manner. This bodes well for profit margins, which are already at sky-high levels near 29% of sales.

The company has materially expanded its store base in recent years, but, fortunately for investors in Starbucks, there is no sign of saturation at this stage. Demand remains remarkably strong, with global comparable-store sales increasing by 5% during the last quarter because of a 4% increase in traffic and a 1% rise in the average ticket value. 

Bottom line
Pricing power generates superior profitability for investors, and perhaps more important, it's a clear reflection of competitive strengths and healthy demand for the company's products. This means companies such as Coca-Cola, Apple, and Starbucks deserve particular consideration from investors looking for high-quality businesses to hold for the long term. You don't need to take my word for it -- just ask Warren Buffett.

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Andrés Cardenal owns shares of Apple. The Motley Fool recommends and owns shares of Apple, Coca-Cola, and Starbucks and has options on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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