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A Thought on the Heinz Acquisition

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Last week's news that Warren Buffett teamed up with 3G Capital to purchase Heinz should come as no surprise to those who have followed his long and storied career. In many respects, Heinz is the kind of company that Warren Buffett loves -- and if possible, purchases outright. When this gets to the checkout line, it will cost over $23 billion and once fully completed, Warren Buffett will own half the company.

Most reports within the mainstream media marveled at Buffett's ability to size up the opportunity, find a partner, and close the deal, which is the largest within the food industry. A few, like Michael Ballaban at Forbes, replied that the deal was "weird."

Let me tell you why it was a sharp deal. There are certain brands that have had a love affair with the American consumer and Heinz certainly sits at the head of the table. The Heinz product family is a large market basket but at its core stands its flagship, Heinz Ketchup.

Perhaps this is a good time to reflect on why "The Durable Competitive Advantage" is so important to Warren Buffett's investment strategy and why you should learn from this "teachable moment."

At Heinz, they understand their marketplace and the balance sheet is sound. It's a safe bet with little downside. That is why they were worth paying a premium of 20 percent above the current market price.

Heinz is one of those cherished American brands and it was founded just after the Civil War. The original Henry Heinz built his successful business around baked beans, relish, and of course ketchup, the Germanic spelling of catsup.

The business was not only successful but the family philanthropy can still be seen throughout the Pittsburgh area where local colleges and nonprofits are beneficiaries of their largesse. Unlike the Fords or the Vanderbilts, the Heinz family lived quietly and created no scandal. John Heinz represented Pennsylvania as a multi-term United States Senator and might still be in Washington today if he didn't die in a tragic plane crash in 1991.

Urban legends even grew up around the brand including one that family matriarch Teresa Heinz received a nickel for every bottle of ketchup sold, something rebutted by her husband, Secretary of State John Kerry, when he ran for president in 2004.

At its core, ketchup is the combination of tomatoes, vinegar, and a number of other ingredients that add taste. However, people cannot get enough of Heinz Ketchup and the proof is found in the 650 million bottles that are sold globally each year. The margins on ketchup alone at Heinz are huge and sustainable for the long term.

Heinz has created a product line that has avoided commoditization. Heinz Ketchup sells at a price point that is 50 percent premium when compared to Safeway's house brand and there has been no erosion during these difficult times. There is an unmatched trust level between the buyer and the brand. Any shopper can find cheaper ketchup on the shelf of any supermarket but people flock back to Heinz because they adore it. It's a love affair that has gone on for a century; we all know that Heinz Ketchup makes a good burger better at any backyard barbecue.

In Warren Buffett's mind, Heinz is much like Coca-Cola, another successful investment he made a generation ago. Instead of vinegar and tomatoes, the ingredients of that soft drink empire are carbonated water, sugar, and caramel. With both companies, their margins have never been commoditized during good times or bad. In each case, both Coca-Cola and Heinz have an unshakable brand relationship with the American consumer.

Now here is what everybody has missed. In the case of Heinz, like Coke and the other product investments Warren Buffet has made, it does not appear that there will be any fresh challenge to Heinz's margins in the long-term based on the brand supremacy of their flagship product. It means that Warren Buffett's rule of Durable Competitive Advantage will remain an investment guide long after the ink dries on whatever contract is signed at Heinz.

What is it about ketchup? A couple of years ago, Malcolm Gladwell wrote an intriguing column wondering why there were so many types of mustard but only few brands of ketchups, notably Heinz and Hunts. The brave entrepreneurs who tried to create their own gourmet ketchups often floundered and failed. They would often complain about the power that these two brands had over the marketplace but they are missing something important.

In my life, I've been to enough backyard cookouts to know that ketchup sets the table for all the other flavors found under a hamburger bun -- from the type of cheese, the onions, the bacon, the lettuce, and yes even the mustard. It's ketchup -- and nothing else, that remains America's condiment of first choice.

But Heinz is more than ketchup. For Warren Buffett, it's the ability of Heinz to protect its margins over the long haul that makes this an attractive purchase. Who knows when this company emerged as a potential acquisition choice? Maybe it was while he was eating a cheeseburger at a Dairy Queen. However, we do know this. Keeping a disciplined approach to investing is a lesson that anyone would certainly relish.

Today's question: Would you invest in the stock that made your favorite food? If yes, what is it? Let me know at Mary@Marybuffett.com.