When I was a little kid, there was this hamburger joint in Clayton, MO that served calfburgers with a cheddar cheese spread and steak fries. My dad used to take me there back in the day, and it was the kind of burger joint experience that Norman Rockwell could have spent some time turning into a painting.
But over the past couple of years, the management team at that burger joint began taking advantage of its brand equity and made no hesitation when it came to engaging in questionable business practices that likely alienated the consumer base. First, they segregated each item into individual pieces while simultaneously raising the price of each—for instance, what once was a cheeseburger and fries for $7.99 turned into a $5.99 hamburger, plus $0.99 for cheese, plus $2.25 for fries. The price of drinks went up from $0.99 to $1.99, and they began charging $0.25 for a refill. The last time I went there with my dad, they had begun charging $0.25 for water.
People don’t like being treated like sheep to be fleeced. When you reach a point where your restaurant starts charging folks for refills and water, you will tick people off and lose long-term customers. When my dad told me that the place had shut down for good, I wasn’t surprised. In fact, I wasn’t even as sad as I thought I’d be. If you engage in terrible business practices that nickel and dime people, how can I get upset when a bad strategy leads to bad results?
I mention this anecdote for one reason: There is a reason why you should pay special attention to PepsiCo, Nestle, Johnson & Johnson, Procter & Gamble, and Berkshire Hathaway when you think about building a portfolio.
Each of those companies have dozens of brands generating $1 billion or more that are broken up into different divisions with different management teams. If the guy running Listerine at Johnson & Johnson makes a strategic error that costs Listerine market share, the Tylenol brand remains unaffected because it has a different management team making different strategic decisions.
The person calling the shots for the Quaker Oats division at Pepsi is not the same person making strategic decisions about Lay’s potato chips.
The strategy for Gillette razors at Procter & Gamble is not related to the strategy for Tide laundry detergent.
If you are the kind of person that is looking to buy stocks today that you can pass on to your kids in 2035, these are the kinds of companies you should be looking at because they have dozens of profit sources that are unrelated to each other and allow the company to keep increasing profits even if one of the divisions falters. The five companies I mentioned above are special because they are a collection of diverse businesses run by different teams that have a habit of generating lots of profits. If you want to hold the shares of the same companies for long, long periods of time, these are the kinds of companies that should be at the top of your research list.
Originally posted 2013-07-16 07:10:05.