Buffett Search for Sure Thing Propels 76-Year Junk Food Quest

Wednesday, 27 Aug 2014 09:03 AM

 

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Billionaire investor Warren Buffett got his entrepreneurial start at age 7, buying six-packs of Coke for a quarter, then hawking the beverages for a nickel apiece on hot summer nights.

Now, at age 83, he’s still betting on simple indulgences.

Berkshire Hathaway Inc. agreed Tuesday to provide $3 billion of financing for Burger King Worldwide Inc.’s purchase of doughnut chain Tim Hortons Inc.

Buffett, Berkshire’s chairman and chief executive officer, has built his career investing in businesses that have broad consumer recognition and appeal. Such wagers, like a $16.6 billion stake in Coca-Cola Co., allow him to park his capital for years while the companies grow in value, fueled by customers who can’t resist their treats.

“I’m the kind of guy who likes to bet on sure things,” Buffett said last year at Coca-Cola’s annual meeting. “No business has ever failed with happy customers.”

Tim Hortons may fit the bill. The chain, known for its Timbit doughnut holes, has a cult-like following in Canada, where it has more than 3,500 stores. Fans have sent the company pictures of tattoos they’ve gotten of its logo, CEO Marc Caira said yesterday on a conference call with reporters.

“A Timbit has become as much a symbol of Canada as the beaver or the Mountie,” Caira said. “The Tim Hortons brand has become part of the Canadian fabric.”

Chewing Gum

Berkshire also owns See’s Candies and Dairy Queen, which sells ice cream and burgers. In 2008, Buffett’s firm helped finance Mars Inc.’s purchase of chewing-gum maker Wm. Wrigley Jr. Co.

“More people will be drinking Coca-Cola 10 years from now, or chewing Wrigley’s gum,” Buffett told Bloomberg Television’s Betty Liu in a 2012 interview. “I know that.”

Jorge Paulo Lemann’s 3G Capital, which worked with Buffett last year to take ketchup maker HJ Heinz Co. private, controls Miami-based Burger King. In the Heinz takeover, Berkshire bought half the common stock for about $4.25 billion and invested $8 billion for preferred shares.

For fast-food chains and candy and soda companies, Buffett “can look into the future and not have to wonder if they’re going to be doing great things,” said Tony Scherrer, director of research at Smead Capital Management, which oversees about $1 billion including Berkshire shares. “Generations to come will be eating Mars candy bars.”

Coca-Cola’s sugary soft drinks and red meat, like the patties in Burger King’s Whopper, are among the biggest contributors to obesity-related illnesses, said Dean Ornish, a nutrition researcher and clinical professor of medicine at the University of California San Francisco.

Increased Risk

Consuming red meat is associated with an increased risk of premature death from heart disease as well as cancer, he said. People who regularly consume sugary drinks have a 26 percent greater risk of developing type-2 diabetes, according to the Harvard School of Public Health.

A Tim Hortons double chocolate donut has 15 grams of fat and 270 calories. Burger King’s Triple Whopper sandwich, with three beef patties, packs 75 grams of fat and 1,160 calories.

Hunger for healthier fare may hurt Buffett’s fast-food bets, said Richard Cook, co-founder of Cook & Bynum Capital Management LLC, which invests in Berkshire and Coca-Cola.

“There’s a real risk that the zeitgeist saying sugar is poison has an effect on consumer habits,” Cook said in a phone interview. “At the margin, it lowers the valuations for these companies. You have to think about, ‘What’s the growth of Coca- Cola going to be over the next 20 years?’ My estimate would be, somewhat less.”

Healthier Options

Coca-Cola and Burger King have worked to introduce healthier options. Burger King said this month that most stores in the U.S. and Canada were phasing out a healthier French-fry option, called Satisfries, that proved unpopular. The same week, Burger King said it would reintroduce breaded chicken fries after customers requested them.

Restaurant chains like Chipotle Mexican Grill Inc. and Panera Bread Co., which some consumers perceive as healthier options, have put pressure on fast-food providers, John Gordon, founder of Pacific Management Consulting Group, said.

Buffett’s food investments mirror his tastes. His daughter Susie told Bloomberg TV in 2012 that the vegetables in his diet include French fries, hash browns and corn on the cob.

Berkshire’s investments extend far beyond food. Buffett’s firm owns the Burlington Northern Santa Fe railroad, an energy company and car insurer Geico. Its largest equity bets included financial firms Well Fargo & Co. and American Express Co. Buffett’s company also invests in DaVita HealthCare Partners Inc., which provides dialysis, and drug company Sanofi.

Burger King is the second-largest hamburger chain after McDonald’s Corp. by number of stores. Berkshire owned shares in McDonald’s in the late 1990s, and Buffett told shareholders a 1998 decision to sell the stake was “a very big mistake.”

He’s also lamented waiting too long to buy Coca-Cola shares. At the soft-drink maker’s 2013 meeting, Buffett said his only misstep as a seven-year-old businessman was not reinvesting his profits in the stock.

© Copyright 2014 Bloomberg News. All rights reserved.

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