Cook & Bynum as a “Conglomerate”: Bottlers, Broadband, Brewers, & Berkshire
One way we think about the Cook & Bynum portfolio as a whole is as a conglomerate comprised of nine carefully selected companies that are organized into four principal divisions with significant operations on five continents: (1) a geographically diversified bottler, (2) a leading telecom serving Chile, Central America, and the Caribbean, (3) a global brewer, and (4) the U.S.-centric diversified businesses of Berkshire Hathaway. To form these divisions, we take the actual pro-rata ownership of each business and look-through to our share of its underlying fundamentals.
The largest division in the conglomerate is a non-alcoholic bottler. Last year, based on our portion of the underlying businesses’ operations, this bottling division produced, distributed, and sold 547 million 12-ounce servings of soft drinks, water, juices, teas, energy drinks, and other beverages to 4.3 million consumers through 25,432 points of sale. Allied with The Coca-Cola Company, this division is far more likely than its competitors to have the brands consumers want, when and where they want them, in the packaging they need for the occasion, and ice cold for their refreshment. These crucial competitive differentiators create a virtuous cycle: dominant brands help build distribution advantages, which enhance market share, which further entrench the brands. The future of the division is bright:
- This bottling division is focused on leveraging its distribution network through initiatives such as investing in returnable bottles that expand affordability for the consumer, extending its offering into alcoholic beverages, and equipping its mom & pop retailers with connected cash registers that provide valuable real-time data.
- Its base of potential consumers is growing. Its average consumer has a median age of 28 years vs. a median age of 38 in the U.S., and the population in its territories is growing at 1.7% per year versus annual population growth of only 0.5% in the U.S. Long term, we expect the bottling division to grow revenues and profits ahead of GDP growth as per capita consumption expands from only 1/3rd of the U.S.’s rate and as consumers trade up in price/ounce from future consumption sizes (e.g., 2-liter bottles) to immediate consumption sizes (e.g., 8-ounce cans).
- These bottling businesses were negatively impacted by the pandemic in direct proportion to the severity of their respective lockdowns. In countries like Chile, Peru, Bolivia, and Turkey, strict lockdowns negatively impacted 2Q revenues and profits by limiting consumers’ ability to buy products. On the other hand, in countries like Mexico and the U.S. where lockdowns were less strict, 2Q revenues were only slightly impacted while profits increased strongly. Stringent lockdowns that hamper the division’s ability to do business now seem politically nonviable in its regions, so the novel coronavirus’ impact for the remainder of the year will largely be indirect through general economic effects. The bottling business is economically resilient, and all of the division’s bottlers have experienced month-over-month revenue/volume improvements since April lows that have continued into the third quarter. As a result, the bottling division is rapidly returning to pre-pandemic volumes and revenues.
- Despite superior brand advantages, favorable demographic trends, and distribution dominance in its territories, the division trades at a 25-30% discount to developed market peers. This situation should be reversed: the slower growing, lower margin developed market peers should trade at a discount to this division.
The second largest division connects and entertains people through broadband internet access, premium TV, mobile services, and undersea fiber across Chile, Central America, and the Caribbean. On a look-through basis, it delivers much needed high-speed internet access to 45,000 homes and provides mobile connectivity to 120,000 users in an area where the demand for connectivity has been rising for years and has risen dramatically in 2020. To satisfy this growing demand, the business has enhanced its network by upgrading its technology and expanding its footprint to connect homes; the division laid the fiber necessary to connect 6,600 new homes in 2019 and has continued to invest through the pandemic to connect more homes. In most of its regions, the division offers the fastest internet speeds available to a home. By the end of 2021, it will offer a comprehensive package of internet service, premium TV, mobile telephone, and fixed telephone in all but one of its major markets. Other markets around the world have demonstrated that consumers prefer having all of these services from a single provider. These “quad play” customers are cheaper to service and have greater loyalty, both highly accretive characteristics for the division’s profits. Additionally, the division owns 853 km of undersea fiber optic cable in some cases representing the only the fiber connecting a Caribbean island to the internet.
This telecom division benefits from excellent incremental returns on capital and has long-term reinvestment opportunities reaching new customers, acquiring competitors, and expanding to adjoining territories. Each new connected home is highly profitable. The pandemic has increased demand for the superior connectivity offered by residential broadband in every country in the world despite the economic conditions. In some markets, the division was immediately able to capture this rising demand to grow revenues and profits. In other markets, however, mobility restrictions impeded customers’ ability to pay for mobile and led customers to move data traffic to their home Wi-Fi. The Caribbean suffered from a virtual halt in tourism, and Panamanian lawmakers passed a law prohibiting the suspension or reduction of services for nonpaying customers until the end of June. In aggregate, this division’s revenues and profits declined modestly in the second quarter with sequential improvement each month from April to July. We expect resilient performance through the remainder of the year as headwinds continue to ease. Our biggest concern is that Caribbean tourism recovers at a slower pace than expected, which could delay the recovery of the tourism-heavy Caribbean economy to pre-pandemic levels. We expect strong revenue and owner earnings growth in 2021 driven by organic subscriber additions, retention of new customers gained during the pandemic, the return of currently nonpaying customers, and the integration of the wireless acquisitions in Puerto Rico (from AT&T) and Costa Rica (from Telefónica).
The third largest division is a world class brewer. Last year on a look-through basis, this division brewed, distributed, and sold 58 million 12-ounce beers across the world, generally in markets where beer consumption is expected to rise the most over the coming decades. Like the bottling division, most of this beer is sold in countries where this brewing division enjoys dominant market share, has superior brand equity, and owns best in class distribution capabilities. In Peru, its largest territory on a blended basis, the division boasts over 99% market share. In 2020, the division has outperformed its competitors and captured market share thanks to superior execution as the industry dealt with extreme shifts in channel and packaging mix driven by the pandemic. Consumers have demonstrated that they still demand and desire its products, and consumption that usually occurs on-premise in bars, clubs, and restaurants has largely shifted to at-home consumption via modern and traditional retail, albeit generally at lower profitability. In three of its top ten markets, the division was prohibited from producing and/or selling beer during the most severe lockdowns; these limitations are now largely gone. Absent any additional temporary prohibitions, we expect the brewing businesses to be resilient against the current economic slowdown even if reduced on-premise consumption continues for some time. As evidence, the Peruvian business still paid its typical dividend at the end of the second quarter despite a “non-essential business” label prohibiting it from operating for most of the quarter.
The fourth division is our stake in Berkshire Hathaway, which provides ownership in a diversified collection of businesses that largely focus on the U.S. market. On a look-through basis, this division wrote $4.8 million in insurance premiums in 2019, including insuring 2,200 automobiles. It transported 800 train carloads and has the capacity to generate 2.5 million watts of electricity. The largest portion of this division is property and casualty insurance and reinsurance. In recent years, the industry suffered from increasing loss trends and inadequate price increases. Berkshire has been characteristically disciplined. The industry has now entered a market environment where prices are increasing rapidly, and Berkshire responded to the opportunity by deploying additional capital in the first half of 2020. The personal insurance business (GEICO) almost tripled its profits so far this year due to a large fall in claims, although it will be returning a good chunk of this windfall to customers throughout the remainder of the year as part of customer-friendly rebate programs. In aggregate, the remaining businesses in energy, railroad, manufacturing, and service/retail have experienced falling revenues and profits in line with the broader market, but in most cases they remain well-positioned competitively. Berkshire has benefitted enormously in recent years from its large ownership stake in Apple, which is now about 20% of its total market value.
A Final Thought
One foundational aspect of our investment strategy should not get lost in this conglomerate simile. We prefer to be long-term holders of exceptional businesses, and our research process is focused on the predictably of long-term cash flows of each business. It is not an accident that we have owned thirty-two distinct businesses (two of them twice) in the nineteen years since the firm began. However, we do look to benefit from the liquidity and intermittent mis-pricings that global public equity markets offer, and we are sensitive to and cognizant of the price paid for an investment. We do and will take advantage of opportunities to sell businesses or divisions that get too expensive and establish new divisions that offer superior risk-reward characteristics.
 An example may be helpful here: Corporación Lindley has 653 million shares outstanding. The conglomerate owns 22.2 million shares, which means its pro-rata ownership of Lindley is approximately 3.4% on a look-through basis.