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Why Warren Buffett Sold Tesco PLC
By Motley Fool | Mon, 28th October 2013 - 10:38
There has been much debate recently about whether supermarkets are a good investment. The news that Warren Buffett has reduced his stake in Tesco (LSE:TSCO) (NASDAQOTH: TSCDY.US) has just added to this debate. In this article, I try to work out why he has sold shares in Tesco.

Buffett bought Tesco because he thought that supermarkets are gaining market share from corner shops and the high street, plus Tesco is expanding in the rapidly growing retail sectors of emerging markets.

A fragmenting retail market

But the reality has been a whole lot harsher. In the UK, the big supermarket chains (Tesco, Asda, Sainsburys, Morrisons) have not only been competing fiercely against each other, but against both high and low-end rivals such as Aldi, Lidl and Waitrose. Whereas a decade ago it seemed the grocery market was being gobbled up by fewer and bigger players, it has now begun to fragment again. Because of this, Tesco is no longer growing in the UK. What about emerging markets? Well, growth here has also been lacklustre. Profits in both Europe and Asia have fallen.

So I think Buffett’s share sale signals some disappointment about Tesco’s growth. But bear in mind that he has retained most of his Tesco shares, which suggests cautious optimism. My view is that Tesco has already expanded a lot, and it is now experiencing growing pains. It is trying to reinvent and refresh its image, both in the UK and abroad. This takes time, patience and hard work.

A work in progress

I have been impressed with the work undertaken to refresh Tesco’s Value and Finest ranges, to introduce restaurant chains such as Harris & Hoole and Giraffe, and to redesign its stores. But I see this job of renewal very much as work in progress, and the improvements have not yet filtered through to the bottom line.

What’s more, supermarkets are evolving from businesses that earn the bulk of their profits through giant out-of-town hypermarkets, to retail businesses that own thousands of town-centre minimarts, as well as mid-sized supermarkets, hypermarkets, plus a myriad distribution centres for their rapidly growing internet sales. As internet sales grow and grow, there is also the potential of alliances with internet retailers. In this world of the long tail, one size fits all no longer works in retail.

Abroad, Tesco has the resources for a big push in markets such as China and India, where the retail market is rather like the States and Europe post-war: full of possibilities for growth. Tesco is taking the partnership approach to emerging market expansion, using and building on tried and trusted brands.

So, long term, I see Tesco consolidating in the UK, and resuming growth abroad. But, in one of the world’s most competitive businesses, its task is not easy. So I see why Buffett is cautious — Tesco’s share price in recent years has been disappointing. But I continue to hold.

The Motley Fool UK

Will Warren Buffett Buy Back Into Tesco PLC?

By Owain Bennallack - Thursday, 20 March, 2014 | See also: TSCOTSCDY

So, it’s come to war.

I’m not referring – thankfully – to Russia’s moves on the Crimean region of Ukraine. Rather, I’m thinking of the supermarket price scrap that Wm. Morrison Supermarkets (LSE: MRW) kicked off last week.

Alongside revealing dire results and admitting that it might need such new-fangled whatchamacallits as loyalty cards, websites and convenience stores after all, the embattled Morrisons also said it would spend a £1 billion in cutting prices over the next three years in an attempt to recover its customers.

Investors in all the supermarkets have taken fright. Morrisons shares are 10% lower than the day before its latest update – but its operational performance was even worse than investors feared it would be, and warranted a big markdown.

Shares in Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) are 4% lower, too, though, and J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) is off 6%.

While the latter has since come to the market with its own miserable news about falling like-for-like sales, the bulk of both declines happened in the immediate aftermath of the Morrisons’ revelations. I think they can at least partly be chalked up to fears that a price war will hurt everyone.

But will it?

Pricing power

There’s little doubt that Morrisons’ prime targets are Aldi and Lidl, the discount chains that have made such inroads in the grocer’s heartlands in the North.

But how far its other rivals will accept that line of thinking remains to be seen.

Cheaper prices are cheaper prices, and they resonate with customers. Sainsbury’s, for example, has a price-matching guarantee on baskets of branded goods, but that counts for naught if the consumers have already gone through Morrisons’ doors instead in search of a cheaper loaf of bread.

Retailers do have different levers to pull besides price – they can try to improve the experience of shopping, improve customer service and introduce new reasons to visit, like Tesco is doing by putting its Giraffe restaurants into its larger destinations.

But, ultimately, a basket of goods is pretty much a basket of goods, and the lowest price will be the most attractive to many people — which is why hard-pressed consumers are defecting to Aldi and Lidl, and forcing Morrisons’ hand in the first place.

Buffeted about

So what does all this have to do with Buffett, and Tesco?

Well, for starters Buffett already owns Tesco shares. While he has reduced his stake by a quarter in the past year, the so-called Sage of Omaha (as opposed to the sage you’ll find on special offer in aisle three) continues to own a 3.7% stake in Tesco.

While he’s made no comment, it seems likely Buffett has sold down his stake because Tesco has turned out to be less wonderful than he initially calculated. It’s struggled to get traction overseas – indeed, it’s abandoned its expensive US venture altogether – and it’s been losing sales and market share at home for the first time that anyone can remember.

Many would argue all this bad news is in the price. Tesco is trading on a P/E of 10 and boasts a dividend yield of very nearly 5% — both far more attractive metrics than the market as a whole. Doesn’t Buffett like to buy cheap?

Also, the sector as a whole is pretty loathed right now.

Doesn’t Buffett like to be greedy when others are fearful?

Retail is ruthless

Both true, but there’s an interesting third reason why I think Buffett would probably still pick Tesco as his chosen wrestler in the brutal UK supermarket arena.

And that’s to do with the business, not with its share price.

In his biography The Snowball by Alice Schroeder, you read how Buffett discovered just how tough retailing was the hard way. For example, he invested in a department store that competed head to head with other department stores in a war of mutual destruction. It wasn’t his finest – or most profitable — hour.

Buffett knows that in a largely commoditised sector – nearly everyone lives near at least a couple of the major supermarkets, after all — it’s usually best to go with the lowest-cost company, especially if there’s a price war going on.

And in the UK grocery business, that’s Tesco.

You can tell this by looking at the operating margins. As of the latest figures available, Tesco’s were a sector-leading 6%, whereas Morrisons’ were 4.9% and Sainsbury’s a woeful 3.5%.

Every little helps

What this means is that in simple terms, Tesco has deeper pockets to fund a price war than its rivals. Indeed, some analysts were already urging it to cut prices to respond to its own woes, even before Morrisons made its move.

I think therefore that if Buffett was buying into a UK supermarket today, he’d still plump for Tesco.

It’s important to note that Tesco’s margins are already slated to drop when it reports in April, but it should still have the juiciest margins to cut if it has to.

So, would this be enough to see Buffett reverse his recent Tesco share sales and load up on them again, now the share price has fallen to around £3?

I don’t claim to know his mind, but I doubt it.

You see, like all wars, a price war can be long and bloody, and even the victor is not necessarily a winner. If prices come down across the board it might be good for consumers, but it could take a long time for Tesco to get those prices back up again, even if it did triumph over its rivals.

Good for consumers, but bad for shareholders. I suspect Buffett would rather sit on the shares he has and watch from the sidelines!

It all goes to show that even the world's best investors can't always pick companies that will serenely advance from year-to-year, untroubled by competition or mishap.

2. ลุงบัฟชอบธุรกิจ ผลิตเงินสด
ไม่ชอบธุรกิจ ดูดเงินสด
ข้อดีของห้างคือรับเงินสด
ข้อเสียคือ เวลาขยายห้าง capex ดูดเงินไปไม่น้อย

China is now the world’s second largest retail market. Total retail sales of consumer
goods doubled to 20.7 trillion yuan in 2012 from 10.8 trillion yuan in 2008. Furthermore,
China is expected to surpass the United States to become the world’s largest consumer
market within five years

1. Buffett is rumored to have a subscription to Advertising Age magazine. He asked himself what it would cost to replicate the Coca-Cola brand in a few years. The conclusion Charlie and he reached was that it probably could not be done – even with $100 billion given to the best marketing team on Earth. At the time, one could have bought the entire Coca-Cola company for under $20 billion. So, here was a company whose brand alone was worth well over $100 billion and the entire company could be bought for under $20 billion.

2. Buffett pored over the last 80 years of Coca-Cola annual reports. He found that, like a software company, their
2.1)gross margin on their syrup sold to bottlers is well over 80%.
2.2)Coke’s future success was a function of the number of servings of coke sold worldwide.
2.3)The more the servings, the more the cash flow.
2.4) He found that over the last 80 years, their syrup volumes sold had risen every single year.
2.5)The last 80 years included many ugly world events – World War I, the great depression, World War II, The Korean War, The Vietnam War, The Cold War, numerous recessions, being kicked out of India in the 1970s et cetera.
Through all of that, Coke has grown every single year.

The question Munger and Buffett posed to each other was simple –
2.6) What volume of syrup might The Coca-Cola Company conservatively be expected to ship in the year 2000…2025…2050?
They probably came up with some mouth-watering numbers, then extrapolated free cash flow (about one cent per eight-ounce serving) and finally arrived at a present value of all that future cash flow.

3) In 1886, when Coke was first concocted, it sold for five cents per eight-ounce serving. Today, one can buy eight ounces of Coke on sale for under 17 cents.
If Coke’s pricing had moved in lockstep with inflation,
we’d be paying several dollars for a single can. This is a very unusual product whose unit price has declined dramatically over the years. Very few consumer products have demonstrated the level of decline in prices that Coke has over the last century.

4.) Billions of people around the world have yet to have their first Coke. In addition, the daily per capita consumption of bottled beverages around the world is miniscule compared to that of the United States and Europe. However, it has risen dramatically in various countries as per capita incomes have risen. We are likely to see big increases in per capita incomes in the third world over the coming decades.

We will next use numerical fluency to ascertain what our target implies.
We can guess reasonably that by 2034 there will be about eight billion beverage consumers around the world.

On average, each of these consumers will be much more prosperous in real terms than the average consumer of 1884. Each consumer is composed mostly of water and must ingest about 64 ounces of water per day.

This is eight eight-ounce servings. Thus, if our new beverage, and other imitative beverages in our new market, can flavor and otherwise improve only 25 percent of ingested water worldwide, and we can occupy half of the new world market, we can sell 2.92 trillion eight-ounce servings in 2034.

And if we can then net four cents per serving, we will earn $117 billion. This will be enough, if our business is still growing at a good rate, to make it easily worth two trillion dollars.

A big question, of course, is whether four cents per serving is a reasonable profit target for 2034.
And the answer is yes, if we can create a beverage with strong universal appeal.

One hundred fifty years is a long time.
The dollar, like the roman drachma, will almost surely suffer monetary depreciation.
Concurrently, real purchasing power of the average beverage consumer in the world will go way up.

His proclivity to inexpensively improve his experience while ingesting water will go up considerably faster.
Meanwhile, as technology improves, the cost of our simple product, in units of constant purchasing power, will go down.
All four factors will work together in favor of our four-cents-per-serving profit target.

Worldwide beverage-purchasing power in dollars will probably multiply by a factor of at least forty over 150 years.

Thinking in reverse, this makes our profit-per-serving target, under 1884 conditions, a mere one fortieth of four cents or one tenth of a cent per serving. This is an easy-to-exceed target as we start out if our new product has universal appeal.

In Warren Buffett’s world, there are only 2 kinds of business:-

(1) The commodity-type business and
(2) The consumer monopoly

The commodity-type business will produce consistently inferior results while the consumer monopoly will make its shareholders richer.

What is a commodity-type business?
What characteristic does it have?
To put it simply, a commodity-type business is one that sells a product whose price is the single most important motivating factor in the consumer’s buy decision. The competition is usually very intense resulting in low prices and hence low profit margins.

One example (localized to our context for relevance) is the telco operators SingTel, M1 and Starhub. Most subscribers will simply go for whoever is offering the lowest mobile rates in town. Competition is good for the consumers but bad for the shareholders.

What is a consumer monopoly?
Warren Buffett thinks that a toll bridge is a classic form of consumer monopoly. Imagine the only bridge across a river. Whoever who wants to cross it has to pay the toll, like it or not. Generalizing, we can have “logical toll-bridges” like the only newspaper in town. Whoever wants to advertise have to pay the rates that the newspaper is asking or you don’t advertise. This gives greater pricing freedom, leading to greater profits for the shareholders. Another form of “logical toll-bridges” is credit card companies like the American Express. I’ll leave it to you to figure out why AMEX is a toll-bridge.

Other forms of consumer monopoly manifest usually as dominant brands. Take Coke for example. When your kid wants a Coke, there is really no substitution. Not Pepsi, not Sarsi, not Yeos’ whatever. A Coke is a Coke period. Similarly, there is no substitute for a McDonald’s Happy Meal. You may argue that these brands have their competition (Burger King, Pepsi) but here’s some food (pun intended) for thought:- When your kid wants some hamburgers, he doesn’t say,” I want hamburger.”…. He says,” I want McDonalds.” When you don’t call a product by its generic name but by its brand, it says something about the monopolistic nature of the business.

chaitorn asked..
k.imerlot หรือ พี่ nb มีความเห็นว่า scope ของ consumer monopoly companies นั้นมีการขยายนิยามออกไปหรือไม่ เพราะ moat ของกิจการมันก็อาจถูกการแข่งขันจากสินค้าทดแทนอื่นได้ด้วย ผ่าน modeการขนส่งอื่นได้เช้นกัน เช่น ถนน เรือ เครื่องบิน ท่อขนส่ง เป็นต้น ธุรกิจนี้มันเป็น consumer monopoly companies ได้อย่างไรหรือไม่ครับ

toll bridge is a classic form of consumer monopoly. Imagine the only bridge across a river. Whoever who wants to cross it has to pay the toll, like it or not.

Generalizing, we can have “logical toll-bridges” like the only newspaper in town. Whoever wants to advertise have to pay the rates that the newspaper is asking or you don’t advertise. This gives greater pricing freedom, leading to greater profits for the shareholders. Another form of “logical toll-bridges” is credit card companies like the American Express. I’ll leave it to you to figure out why AMEX is a toll-bridge.

In the rail sphere alone, BNSF moves over 1 million barrels per day of Bakken crude to market, with The Dallas Morning News declaring in June 2013 that “without BNSF, the great North Dakota oil boom wouldn’t be as big.”
http://www.globalresearch.ca/warren-buf ... on/5363626

imerlot เขียน:มาต่อด้วย
ต.ย.
Decision Tree

เคยโพสต์ไว้ใน
http://board.thaivi.org/viewtopic.php?f=1&t=56000
imerlot
Post subject: Re: ขยายขอบเขตความรู้ : ในด้านรูปแบบธุรกิจ อย่างไรดี?
PostPosted: Sun Jun 30, 2013 6:32 am

imerlot เขียน:"มีธรรมชาติของธุรกิจนั้นๆอย่างไร"??

ถ้าในขบวนการของ Value Investment Concept แล้ว

1. ควรริ่เริ่ม จากการแยกให้ออก ระหว่าง
ก. commodities business
ข. High Value Added (HVA) business
(ยังไม่ ไปถึง Sustainability business)

โดย เช่น อาจฟัง สัมนาที่ ผู้บริหารชั้นนำไปพูดก็ได้ เช่น
http://www.youtube.com/watch?v=99O6nauz48A
{ใน http://www.youtube.com/moneytalkchannel}
งานเสวนา มองไปในอนาคตกับสุดยอด CEO วิศวฯ จุฬาฯ 1
นาที 1:36:52 คุณ กานต์ SCG พูดถึง HVA

หรือจาก ต.ย
SCG ในยุค Creative Economy
http://www.brandage.com/Modules/Desktop ... oupID=1218


2. แยกให้ออก ระหว่าง
ก. Low Moat Business
ข. Wide Moat Business
อันนี้ ผมก็กำลัง เก็บความรู้ อยู่
โดยตามอ่าน ลุงบัฟ ลุงมังเกอร์
เช่นจาก
http://www.tilsonfunds.com/motley_berks ... eeches.php
ส่วนอันนี้ ผมเคย เก็บตกไว้เล็กน้อย
Post subject: 'Wide Economic Moat'
http://board.thaivi.org/viewtopic.php?f=1&t=52403

3. แยกให้ออก ระหว่าง
ก. Low Sustainability Business
ข. High Sustainability Business (หรือ Responsible Investment)
ธุรกิจที่มีประโยชน์ไปถึงรุ่นลูกรุ่นหลาน เพราะรักษ์โลกว่างั้น
จะอธิบายโดยไปอ่าน
Call It What You Like — New Investing Approach Gains Followers
โดย By Lisa Woll May 16, 2013
http://www.bloomberg.com/news/2013-05-1 ... owers.html

หรือ ที่เคยเขียนไว้ใน
Post subject: Re: ฝึก..จากมีดบิน..ลี้คิมฮวง
http://board.thaivi.org/viewtopic.php?f ... 7&start=30
"แต่บัดนี้เราเข้าใจแล้ว คุณค่าที่แท้จริงของอาวุธชนิดใดก็ตาม..
มิใช่อยู่ที่ตัวมันเอง..แต่อยู่ที่เรื่องที่มันกระทำ"

คุณค่าของ.หุ้นที่ดีก็ไม่ได้อยู่ที่ตัว มันเอง..แต่อยู่ที่เรื่องที่มันกระทำ

เช่น เรื่อง ขวดน้ำดื่ม "อีโค-ครัช”
หรือ ตอน ลุงบัฟไปซื้อ Heinz
http://board.thaivi.org/viewtopic.php?f ... 8&start=30

For example, Heinz announced a groundbreaking partnership in February 2011 that enables us to manufacture fully recyclable ketchup bottles using The Coca-Cola Company's PlantBottle™ technology. Up to 30% of the PlantBottle packaging material comes from a renewable source – plants – unlike traditional plastic bottles made from non-renewable fossil fuels.

...
ยาวไปนิด..
ผิดถูกขออภัย
เป็นแนว "ความคิด"
ลองไป ต่อยอดดู
..

เป็นการเลือกระหว่าง 2 ทางเลือก

credit card companies like the American Express. I’ll leave it to you to figure out why AMEX is a toll-bridge.

chaitorn เขียน:อ. Imerot หรือ พี่ nb มีความเห็นว่า scope ของ consumer monopoly companies นั้นมีการขยายนิยามออกไปหรือไม่ เพราะ moat ของกิจการมันก็อาจถูกการแข่งขันจากสินค้าทดแทนอื่นได้ด้วย ผ่าน modeการขนส่งอื่นได้เช้นกัน เช่น ถนน เรือ เครื่องบิน ท่อขนส่ง เป็นต้น ธุรกิจนี้มันเป็น consumer monopoly companies ได้อย่างไรหรือไม่ครับ

Nevercry.boy เขียน:จุดตายของพวกนี้ไม่ใช่คู่แข่ง แต่มีการล้มกระดาน เกิดขึ้น

โกดัก ไม่ได้ตายเพราะฟูจิ

โกดัก ตายเพราะ?

department stores: Munger has said that department stores in downtown areas once had a very strong moat given economies of scale and a central location near mass transit.

But then the way people lived started to change as cars became more affordable and people migrated to suburbs with shopping centers. The arrival of Amazon.com has further damaged the moat of the big-box retailers of all kinds whether in the city or the suburbs.

chaitorn เขียน:กระทู้นี้ชอบจริง ๆ
ได้เห็นมุมเหมือน มุมต่าง มุมที่เข้าใจผิด วิธีคิดที่แยบยล ทำให้กระจ่างขึ้นเยอะเลยครับ
ขอบคุณ อ. IMEROT และ พี่ NB ที่ทำให้ผมเข้าใจกระจ่างขึ้นพอควร ต้องไปศึกษาต่อครับ