

Berkshire and 3G Capital to Buy Heinz for $23 Billion - filvdg
http://dealbook.nytimes.com/2013/02/14/berkshire-and-3g-capital-to-buy-heinz-for-23-billion/

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AlexMuir
Over the last few months I've been noticing a lot of adverts for Heinz
products on the radio. They go like this:

"When I was younger dad would take us out for fish and chips. We'd walk along
the canal and feed the ducks, even in the rain. Then I'd unwrap the bag, with
the steam rising, and squirt on a dollop of ketchup. And, like always, it has
to be Heinz."

I'm always amazed at the ability of brands to sell £0.20 products for £2.00,
and the supermarkets who then sell £0.16 products for £1.00 and claim it's
_value_.

I worked for Lucozade (UK Gatorade) for a while. Our total cost, delivered to
retailer, of a bottle was 12p. We sold it to them for min 50p and they sold it
for at least £1.

Ultimately this is a bet on the longevity of consumer brands, which I think is
probably a wise one.

~~~
nirvana
You're looking at the cost of production, and then the price and assuming that
all of the space between the two is profit, and seem to be implying that
somehow it is a ripoff.

What you're not considering is the value to the customer.

The incremental cost of a copy of Microsoft Office (with electronic delivery
they cut out virtually all of their manufacturing cost) is close to zero.
Probably 12p as well.

Yet Microsoft sells that Office Suite for $99 or much much more.

If the value of one copy of that office suite to a company is $10,000 in
improved efficiency (eg: salaries saved by not having to pay overtime or hire
as many people-- remember when spreadsheets were physical sheets of paper and
companies had staffs of dozens of women whose sole job was to type up
correspondence on typewriters?) then they are "profiting" even more than
Microsoft is because the spread is wider.

Further, manufacturing costs are only one part of the costs of a product. Yes
there's marketing, and advertising which you may hate, but there's also the
offices that house the workers that run the company, the royalties paid to
people who generate formulations, the taxes paid to the government, the
manifold fees, costs, and expenses involved in running a business. All of
these raise the actual "cost" from above the 12p manufacturing (and delivery
costs I assume you included.)

For me, the value of buying a brand that has reliable quality control is often
pretty high.

If a high quality bottle of ketchup elevates the satisfaction of an
inexpensive meal (say fish & chips) to the point where it is on par with a
much more expensive meal, like those workers using office, I may be getting
more "profit" out of the transaction than the company.

This is how I use ketchup. It means I eat out less, and spend less on food and
have a higher quality of life.

~~~
AlexMuir
Ketchup is a physical product with raw material costs which requires physical
storage and delivery, and must be distributed through intermediaries. It also
has a shelf life, and ingredients that fluctuate in price seasonally. Your
comparison is about as sensical as me complaining I can't type an essay using
100 bottles of ketchup.

However, my points are that a) we routinely pay 10x the 'value' of food
products, and b) supermarkets piggy back off our conditioning by brands to
offer us 'value' products which still cost 8x what they are worth without any
of the advertising/marketing overhead.

The parallel would be if Macbook Airs were being made and delivered to Apple
stores for $100, or cars were delivered to dealers at a cost of $2,000 and
then sold to you for $20,000.

~~~
twoodfin
You keep talking about the 'value' of products and what they're 'worth'.

Things are worth what people will pay for them. As nirvana pointed out,
looking at only the marginal production cost of something is highly
misleading. Heinz makes about 36% gross margins [1], which is certainly good,
but it's not as if they're seeing the 'value' of that '10x' markup. And lest
you think the rest of their cost is advertising to fool people into spending
too much on ketchup, their total marketing (not just ads) budget is only a few
hundred million[2] (at least as of 2006) vs total revenue of over $10B.

[1] <http://ycharts.com/companies/HNZ/gross_profit_margin>

[2] [http://adage.com/article/news/heinz-ceo-boost-ad-spend-
proxy...](http://adage.com/article/news/heinz-ceo-boost-ad-spend-proxy-fight-
forces-hand/110939/)

~~~
pyre

      | Things are worth what people will pay for them.
    

If I pay $50 million for a forged Mona Lisa, does that mean that forgeries of
the Mona Lisa are all worth $50 million?

~~~
tedunangst
It means, at the time you bought, you thought the painting was worth $50
million. Later, when you discover it's not, you'll be less likely to buy
anything else from that art dealer. Same as anything else in life. People keep
buying ketchup because ketchup remains valuable to them, even at $2 a bottle.

------
pathdependent
Check out the call options yesterday. Either Buffet's traders were
implementing some hedge strategy, or someone made a fat insider trade. Zero
hedge covered it: [http://www.zerohedge.com/news/2013-02-14/so-who-leaked-
heinz...](http://www.zerohedge.com/news/2013-02-14/so-who-leaked-heinz-deal)

------
WillyF
I've heard stories that Heinz is so defensive of their brand that they send
out "Ketchup Inspectors" to make sure restaurants aren't refilling Heinz
bottles with lesser ketchup. This is the only somewhat legitimate source that
I could find: <http://www.freerepublic.com/focus/f-news/1067133/posts>

~~~
nicholassmith
I'm sure there was a reddit where someone said they'd worked in a restaurant
and they'd seen the ketchup checks happening.

~~~
Evernoob
What's the penalty if you get caught? Restaurants usually just say it's
"ketchup" without mentioning that it's Heinz. What can Heinz actually do to
you if you buy a bottle of their stuff and fill it with something else?

~~~
lukeschlather
That's a really clear-cut trademark issue. If you're using Heinz' trademark to
sell a different product they can sue you easy.

~~~
lutusp
> If you're using Heinz' trademark to sell a different product they can sue
> you easy.

No. If you're using the Heinz trademark in such a way as to confuse and
mislead the public, then they can sue you. Otherwise probably not.

Consider the example of Apple Computer and Apple Music (once owned by the
Beatles). Two businesses, no conflict, so no lawsuit.

Once Sun Computer threatened to sue me because I had a Web page named "Sun
Computer" (the page computed the position of the sun:
<http://www.arachnoid.com/lutusp/sunrise/>). My argument was that I wasn't
trying to confuse the public, and my use of the word "sun" was legitimate
because it referred to the astronomical object by that name. Their objection
was that my use of "Sun Computer" as a page name caused my page to appear
above theirs in the Google search listings.

I decided their position had merit, and I renamed the page. My point is that
it is all about the degree to which use of a trademark or trademarked name
would confuse the public and hurt someone's business, not use of a trademark
_per se_.

~~~
ricardobeat
The different product the parent mentioned is still ketchup. The scenario is
replacing the ketchup in a Heinz bottle with ketchup from another brand, not
selling "Heinz Cola" or something.

~~~
lutusp
My post showed that the OP was wrong -- it showed that using a trademarked
name is not in and of itself actionable. There has to be a basis for action
apart from the simple fact that the names are the same.

~~~
ricardobeat
Taken out of context, you're completely right.

------
tribeofone
Great article about Buffet and his strategy in the economist a while back:
<http://www.economist.com/node/21563735>

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filvdg
<http://en.wikipedia.org/wiki/Heinz_57> has the list of the 57 varieties

------
filvdg
Every dev needs Ketchup ...

~~~
dylangs1030
Well, he's not a developer, but I see your point.

~~~
filvdg
Business development ?

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geraldchan
The fundamentals of this transaction will be outside the scope of
understanding of the HN crowd.

~~~
ww520
What are the fundamentals of this transaction?

~~~
jcampbell1
Heinz is a 100 year brand and generates about $1.3B a year in after tax cash.

~~~
Retric
1.3 / 23 is less than 6 percent ROI, and buffet thinks this is a good
investment. Granted, they may think the business can be streamlined, but I
still think this says a lot about the capital glut that's driving down
returns.

Ps: Most of this deal is financed with debt, so there buying 6% ROI with debt.

~~~
r4vik
as long as the debt costs them less than 6% then free money

~~~
3am
Berkshire Hathaway's biggest problem is finding productive investments on the
scale of the cash they generate. There insurance float provides them with what
is essentially interest free loans if they estimates losses well.

