Warren Buffett: “When you were a 16-year-old, you took a box of candy on your first date with a girl and gave it either to her parents or to her. In California the girls slap you when you bring Russell Stover, and kiss you when you bring See’s. You cannot destroy the brand of See’s candy. Only See’s can do that. You have to look at the brand as a promise to the customer that we are going to offer the quality and service that is expected. We link the product with happiness… there's something in the mind about a brand. I mean, you have something in your mind about Coca-Cola - but you don't have anything in your mind about RC Cola because they've never been, you know.”
Charlie Munger: “We didn’t know the power of a good brand until we bought See’s Candies. Over time we just discovered that we could raise prices 10% a year and no one cared. Learning this changed Berkshire. It was really important… How would you try to create a brand that competes with Disney? Coke is a brand associated with people being happy around the world. That is what you want to have in a business. That is the moat. You want that moat to widen.”
Last week, we discussed the Achilles heel of Buffett and Munger in retail stocks in the article “Buying Furniture with Warren Buffett and Mrs. B at Asia's Wide-Moat Furniture Innovators” and how value investors can overcome this tough investment hurdle to identify compounders before their wide moats become obvious by the investment community. This week, we examine their greatest investment strength – picking consumer brands – and the case of an unusual wide-moat consumer-brand innovator in Asia.
Imagine if Warren Buffett-Charlie Munger’s See’s Candies, Coca-Cola, Gillette/Pampers (P&G), Heinz and a host of iconic consumer-branded products that they had successfully invested in are stripped of their trademarked name, logo and nice emblazoned packaging design. Would consumers – and Buffett and Munger! - consider them as “brands” and still buy them?
How would Buffett-Munger evaluate Ryohin Keikaku (7453 JP, MV $5.2bn), owner of MUJI? MUJI stands for Mujirushi Ryohin (無印良品), which translates to "No Brand Quality Goods" and “All Value No Frills”. None of MUJI’s 7,500 “minimalist” products, including household products (36.9% of sales, including linen & interior goods, furniture, household appliances, houseware, stationary, cosmetics), apparel (53.5% of sales, including underwear, socks, bags and shoes), and food products (8.2% of sales) have a logo or are wrapped in fancy, distinctive packaging. Plain but not generic, MUJI’s products have a simple aesthetic that appeals to certain customers. In fact, it is the lack of a name brand that many find enticing. With more than 700 stores worldwide (284 directly-managed and 117 licensed stores in Japan), including 301 stores overseas (130 in China), the Japanese retailer has a cult-like following. MUJI seems like a Japanese nazonazo (riddle): one of the most beloved Japanese brands that isn’t a brand.
Ryohin Keikaku (TSE: 7453) - Stock Price Performance 1995-2015 Vs Nikkei 225 Index
So what is it about MUJI that accounts for its rising success? Often hidden in the seemingly simple designs are functions that make MUJI’s products stand out. Its toilet brush, for example, has a small cover to protect water from splashing while cleaning. Their summer sheets are made of special linen that absorbs moisture better than cotton. But you might argue that many other companies can copy MUJI’s minimalist product concept. After all, wouldn’t MUJI lose its competitive edge in terms of pricing to the fast-fashion outlets such as apparel giant Uniqlo/Fast Retailing (9983 JP), low-priced furniture giant Nitori (9843 JP), and the myriad 100-yen stores that were features of every new mini-mall? And MUJI’s rising success is all the more amazing when we revisit one of Munger’s fascinating insights about brand-based moats. Munger imparted his wisdom that “informational advantage” enables brands to leverage into advantages of scale:
Munger: “The informational advantage of brands is hard to beat. And your advantage of scale can be an informational advantage. If I go to some remote place, I may see Wrigley chewing gum alongside Glotz’s chewing gum. Well, I know Wrigley is a satisfactory product, whereas I don’t know anything about Glotz’s. So if one is 40 cents and the other is 30 cents, am I going to take something I don’t know and put it in my mouth—which is a pretty personal place, after all, for a lousy dime? So, in effect, Wrigley simply by being so well known, has advantages of scale—which you might call an informational advantage. Everyone is influenced by what others do and approve. Another advantage of scale comes from psychology. The psychologists use the term, ‘social proof’. We are all influenced—subconsciously and to some extent consciously—by what we see others do and approve. Therefore, if everybody’s buying something, we think it is better. We don’t like to be the one guy who is out of step. Again, some of this is at a subconscious level and some if it isn’t. Sometimes we consciously and rationally think, ‘I don’t know much about this. They know more than I do. Therefore, why shouldn’t I follow them?’ The social proof phenomenon which comes right out of psychology gives the huge advantages to scale—for example, with very wide distributions, which of course is hard to get. One advantage of Coca-Cola is that it is available almost everywhere in the world. Well, suppose you have a little soft drink. Exactly how do you make it available all over the Earth? The worldwide distribution setup—which is slowly won by a big enterprise—gets to be a huge advantage….And, if you think about it, once you get enough advantages of that type, it can become very hard for anybody to dislodge you. All told, your advantages can add up to one tough moat.”
Thus, the “no-name” MUJI products apparently do not emit the “informational advantage” that Munger described – carrying or using a MUJI product is not observable by others and the “social proof” effect seemingly breaks down.
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