Warren Buffett is one of the smartest and most successful investors ever; that's beyond discussion. However, that doesn't mean you must agree with everything Buffett says. In fact, his recent comments regarding Coca-Cola (NYSE:KO), Whole Foods (NASDAQ:WFM), and consumer happiness seem particularly questionable.
Warren Buffett has a sweet tooth
Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) has large investments in several different companies in the food and drinks business. Soda giant Coca-Cola is one of Berkshire's biggest positions and among its most iconic holdings. Berkshire also owns See's Candies, and together with 3G Group has a 51% ownership in The Kraft Heinz Co., among many other investments in the industry.
These companies are typically market leaders, and they also benefit from extraordinary brand power. However, consumer demand is changing: Many people are moving away from food and drinks with high calories and lots of artificial ingredients and toward healthier, more natural, alternatives.
During Berkshire Hathaway's annual shareholder meeting on Saturday, Buffett faced some questions regarding how the trend toward healthier nutrition could affect companies like Coca-Cola. The Oracle of Omaha admitted that companies must adapt to changing consumer behavior as "no one does well ignoring consumers." However, he also made other comments pointing in a different direction.
Buffett is in great health for his age -- 84 -- and he is an avid consumer of Coca-Cola, hamburgers, and candy, among other products most doctors and nutritionists don't typically recommend. In his typical humor he said that nearly a quarter of the calories he consumed in his life came from Coca-Cola: "I'm one-quarter Coca-Cola."
According to Buffett, Coca-Cola products make consumers happy, and happy consumers tend to live longer and better lives. This is a valid point, but Buffett went as far as saying that people on a healthier diet are not as happy: "I don't see smiles on the faces of people at Whole Foods." This is where I humbly say the Oracle of Omaha is plain wrong.
On the link between healthy eating and happiness
Happiness is a very subjective idea, and sugary foods and drinks can certainly put a smile on your face in the short term. Instant gratification can be crucial driver of purchase decisions for many consumers, so Coca-Cola will probably always make big sums of money by selling its traditional sodas, even if consumers are well aware of their negative health impact. Besides, it's all about finding a happy medium when it comes to tasty versus healthy nutrition.
However, in addition to the well-documented benefits on physical health, medical research has proven that healthier nutrition can actually be much better for your overall mental and psychological well being in the long term. It turns out that soft drinks can make you smile for a while, but the kinds of drinks sold at Whole Foods can increase your happiness and reduce the risk of suffering from depression or anxiety over the years.
Besides, who is to say a glass of Coca-Cola necessarily tastes better than a glass of organic cranberry juice? While it ultimately comes down to personal preference, many consumers consider natural foods and drinks both healthier and more flavorsome than their sugary rivals. After all, there is a reason consumers are willing to pay higher prices for these kinds of products than for traditional sodas.
On Coca-Cola and Whole Foods
Buffett is right about Coca-Cola's ability to adapt to changing consumer demand. The company has the brand reputation, global distribution network, and financial resources to invest in areas such as product development and marketing, so Coca-Cola will do better than fine in the long term.
While soda sales volume has stagnated or even declined in major markets such as the U.S. over the last several years, the company has a global portfolio comprised of 20 brands that each makes more than $1 billion in annual revenue. Among those brands, Gold Peak tea, Fuze tea, and I LOHAS mineral water, which is sold in Japan, crossed the $1 billion threshold in 2014, demonstrating that Coca-Cola is rapidly adapting to emerging consumer trends and growing demand for healthier drinks.
When it comes to Whole Foods, however, Warren Buffett is on the wrong side of the trend. The company faces competition, both from smaller, deeply focused, players and from traditional grocery stores entering the organic and natural foods business. This is putting some pressure on sales growth and profit margins, but growing competition reflects that industry demand is stronger than ever.
Whole Foods reported $14.2 billion in sales in fiscal 2014, more than three times the $4.7 billion in total revenue the company produced during fiscal 2005. In the quarter ended in February, Whole Foods delivered a 10% increase in revenue on the back of a 4.5% jump in comparable sales. Based on those numbers, consumers seem to be quite pleased with what Whole Foods has to offer.