Why Warren Buffett Won’t Buy Kellogg Company

The rumor mill has ignored Charlie Munger's opposition to the cereal business.

May 19, 2014 at 12:59PM

Buffett Pic

Rumors are swirling that Warren Buffett may have his sights set on Kellogg (NYSE:K) as the next major acquisition for Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B).

It's a compelling argument at first glance. Kellogg's $24 billion market cap is large enough to move the needle at Berkshire. The company fits alongside brands like Coca-Cola (NYSE:KO) and Heinz as a quality consumer foods company. And free cash flow consistency is top-notch, surpassing $1 billion per year in the past three years.

It seems like a dream company for Berkshire. That is, if you ignore everything Charlie Munger has ever said about cereals.

A competitive disaster waiting to happen
In a now-famous speech to business school students at USC, Munger explained his perspective on the cereal business.

He compares cereals to airlines, noting that the industry is commoditized and highly competitive. Cereals are so commoditized, in fact, that the premium and discount products in any particular category are often made by the same manufacturer.

But I digress; let Charlie Munger do the talking:

[I]n other fields -- like cereals, for example -- almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good, you might make 40%. But why are cereals so profitable -- despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it.

Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That must be the main factor that accounts for it.

And maybe the cereal makers by and large have learned to be less crazy about fighting for market share -- because if you get even one person who's hell-bent on gaining market share....For example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I'd ruin Kellogg in the process. But I think I could do it.

It's in the last paragraph that I think Munger really hits on the reason why Berkshire Hathaway wouldn't own Kellogg, or any cereal business, for that matter. The product is so commoditized, and consumers are so price sensitive, that one bad actor in the industry could ruin the profits for everyone.

A bet on Kellogg is also a bet on General Mills and the many private-label brands in existence. Once one industry player shoots for market share, rational pricing goes out the window. Declining profits would follow.

While I'm perfectly willing to admit this quote is old -- 20 years old, in fact -- the economics of the business have hardly changed. If anything, the economics are more challenging. Personal incomes have flatlined for more than a decade. Private-label brands have improved in quality and in quantity. And cold cereal volumes have been in a consistent decline, especially among health-conscious families, who take issue with the fact kids' cereals contain up to 56% sugar by weight.

Kellogg passes the smell test for the rumor mill, but it seems unlikely to ever be a Berkshire brand.

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway and Coca-Cola. The Motley Fool owns shares of Berkshire Hathaway and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

Something big just happened

I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was rated #1 in the world by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations moments ago. Together, they've tripled the stock market's return over 12+ years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.

Compare Brokers