Warren Buffett’s Regret: Selling McDonald’s Stock

This article is a summary of the YouTube video ‘Warren Buffett: Why I Regret Selling McDonald’s Stock’ by The Long-Term Investor

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Written by: Recapz Bot

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Warren Buffett regrets selling McDonald’s; evaluating decisions is crucial; separating real estate would be difficult; Charlie Munger agrees; growth potential internationally is weak; loyalty in fast food is weak; McDonald’s success is unique; price-sensitive; shaving impacts habits; Sensor for women successful.

Key Insights

  • Warren Buffett admits that selling McDonald's was a mistake.
  • Berkshire Hathaway believes in post-mortems and evaluating both purchase and sale decisions.
  • Separating McDonald's real estate business from the franchising business would be difficult and not necessarily create more value.
  • Charlie Munger agrees with the way McDonald's handled its real estate ownership.
  • McDonald's has high net returns on capital and its multiple would not be greatly affected if the real estate was separate.
  • Buffett believes the growth potential of McDonald's internationally is not as strong as consumer products.
  • Fast food decisions are often based on convenience, and loyalty is not as strong as with single consumer products.
  • McDonald's success in creating a large chain of restaurants is unique in the industry.
  • McDonald's is price-sensitive and people can spend more money on hamburgers compared to razor blades.
  • The comfort and quality of shaving with razor blades have a significant impact on people's habits.
  • The introduction of the Sensor for women has been a successful enlargement of the market.

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Transcript

[Please note that the following formatted transcript may not be perfectly aligned with the original video due to limitations in text formatting.]

Good afternoon, Warren, Charlie. Hi, Peter. Good to see you.
I’d like to ask you what your thought process was when you — or share with us your thoughts — when you decided to sell McDonald’s. That must have been Charlie’s idea, Peter. Peter, incidentally, is in a family that four generations have essentially invested with us, and they’re all terrific people, I might add. Dad was a wonderful guy.
The — you know, I said it was a mistake to sell it, and it was a mistake, and I just reported that in the interest of candor, and there were some reasons why I thought it was something we — I didn’t think it was — I didn’t think, obviously, that it was any great short sale or even a great sale, but I didn’t think it belonged in the list of eight or ten of the businesses — of the very few businesses that we want to own in the world. And I would say that — that that particular decision has cost you in the area of a billion dollars-plus.
Charlie? You want me to rub your nose in it? You’re doing a — you’re doing a pretty good job by yourself. By the way, that’s a good practice around Berkshire. We do rub our own noses in it. We don’t even need the help of the candors. No, we — we believe in post-mortems at Berkshire. I mean, we really do believe — one of the things I used to do when I ran the partnership was I contrasted all sale decisions versus all purchase decisions. It wasn’t enough that the purchase decisions worked out well, they had to work out better than the sale decisions.
And managers tend to be reluctant to look at the results of the capital projects or the acquisitions that they propose with great detail a year or two earlier to a board, and they don’t want to actually stick the figures up there as to how the reality worked out against the projections. And that’s human nature. But I think you’re a better doctor if you drop by the pathology department occasionally, and I think you’re a better manager or investor if you look at every one of the decisions you’ve made of importance and see which ones worked out and which ones didn’t, and what is your batting average. And if your batting average gets too bad, you better handle the decision-making over someone else. Charlie, do you want to rub my nose anymore? No.
In your description of McDonald’s, you have the sense that there’s a great business buried in McDonald’s, and there are two good businesses that are mixed in with it. And the problem is with the real estate and the operational business, that as the company is currently capitalized, they can’t earn the same kind of returns they can earn in the franchising business.
You were, or still are, a significant shareholder of McDonald’s. I guess my question is, the solution is obvious. Why don’t you push for a solution that creates the same opportunity you have at International Dairy Queen?
Well, my guess is, I don’t know the details on it, but my guess is that with 23,000 locations all over the world, I think it would be extraordinarily difficult to separate the real estate business out from the franchising business at this point. I think they could have gone a different route. I’m not saying it would have been a better route at all. In fact, I think the odds are they followed the right route in owning and controlling so much real estate. But I just think the problems would be horrendous. Certainly, you wouldn’t want to sell it and lease it back, because you would not end up with more value, in my view, by doing that. And spinning it off in a real estate trust or something with operating in 100-plus countries, with all the franchise arrangements, I think it would be a huge, huge problem. I would not want to tackle it myself.
So I think that you should look at McDonald’s, and I don’t know anything about their plans on this, but I think you should look at McDonald’s as being a very good business, but the one that will continue in its present mode vis-a-vis the real estate, although I think they’ve signaled that they’re going to do less on new properties, somewhat less in connection with ownership than they’ve done to this point. But there’s 23,000 locations out there, and every operator, his own arrangement is very important to him, and it just—it would be a mammoth job, and I’m not sure how much extra value would be created in the end anyway.
Charlie? Yeah. The net returns on capital McDonald has earned all these years are high, even though they have owned a lot of their real estate. I think it’s hard to quarrel with the way they did it. They had the best record. And the multiple is not greatly different, in my view, than if the real estate were separate. I mean, now, if you get all the real estate de-taxed in some arrangement, you might get a little more out of it, but it doesn’t strike me as a big deal.
I’m Joe Knob from Seattle, a shareholder, Mr. Buffett and Mr. Monger. I wonder if you could comment a little bit further on McDonald’s, carrying forward your comments of this morning, but more oriented toward how the McDonald’s would stack up against the inevitables in international-type business, what your vision would be on their growth potential in places like Germany, China, so on and so forth.
I guess I just would have to stick with my comment that you won’t get the inevitability in food that you will get in a single consumer product, such as blades. If I’m using a Gillette sensor blade today, the chances are—I’ll try the next generation that comes out. It’ll be the Sensor Accel right now, but I will try the next one that comes out, obviously, but I will not fool around at all in between. A very high percentage of people that shave, including women in shaving, they’re happy with the product. It’s not expensive. It’s $20-odd a year, if you’re a typical user, and if you’re getting a great result, you’re not going to fool around, whereas a great many of the decisions on fast food as to where you eat is simply based on which one you see. I mean, convenience is a huge factor, so if you are going by a McDonald’s or a Burger King or a Wendy’s, and you happen to be hungry at that point, or if you’re traveling on the road and you see one of those signs up, you’re probably going to stop at the—you may very well stop at the one you see. So there’s a loyalty factor, but it’s just not going to be the same in food. People want to vary their—I don’t. I mean, I’m happy to eat there every day, but most people want to vary where they eat as they go through the week or the month or the year, and they don’t really have any great desire to vary their soft drink the same way. It’s not the same thing. So there’s no knock on McDonald’s at all. It’s just the nature of the kind of industry they’re in.
Charlie? I can’t think of anybody else who, before McDonald’s, ever did what McDonald’s did to create a chain of restaurants on such a scale that worked. Oh, Howard Johnson’s tried. Yeah, there were a lot of failures. Some of you are old enough around Omaha to remember Reed’s— Harker’s. Or Harker’s. Harker’s. Harker’s Wholesome Hamburgers. Right. And they came and they went, those chains, but it is a much tougher business that McDonald’s is in. It’s price-sensitive, too, I mean, obviously. Part of that’s comparative. You can spend a lot more money on hamburgers in the course of a year than razor blades. I mean, you can’t save that much by changing razor blades. Yeah, the average person will buy 27—in the United States, 27 Censorex cells a year. That’s one every roughly 13 days. And I don’t know what the retail price is because they give them free to us as directors, but, you know, if they’re a dollar, it’s 27 bucks, I mean, and it makes a lot of difference. That’s what’s happening, of course, around the world is people that are using cheap double-edged blades or whatever. They keep moving up the comfort scale, the comfort ladder, and Gillette is a direct beneficiary of that. The difference between having great shaves and very so-so shaves and lots of nicks and scratches and everything is 10 bucks a year or 12 bucks a year. I mean, that is not—that’s not going to cause many people to change their habits. And, incidentally, the sensor for women has just been a huge success. I think they’ve had more razors go out on that in the same period when the original sensor came out for men. So that’s been an enlargement of the market. I would not have guessed that would work that well. Or that all the women just use the disposables or their husband’s boyfriend’s razor, but thank God they’ve gotten over that.

This article is a summary of the YouTube video ‘Warren Buffett: Why I Regret Selling McDonald’s Stock’ by The Long-Term Investor