Buffett Has History on His Side When It Comes to Candy Moats

(Bloomberg) -- When it comes to sweets, it’s hard to argue with Warren Buffett.

The billionaire investor -- a longtime backer of See’s Candies who’s known for walking the halls of his annual meetings holding an ice cream -- has argued that big candy brands have so-called moats that can maintain their advantage against new competitors. But fellow billionaire Elon Musk has called that premise into question, saying that moats are “lame.”

Who’s right? Well, the data seems to support Buffett more than Tesla Inc.’s chief Musk. Though some confectionery upstarts have infiltrated the industry, the top candy makers have remained largely consistent.

Take, for instance, Mars Inc. and Hershey Co., the two largest U.S. candy companies. They’ve maintained their share over the last three years, according to Euromonitor. Mondelez International Inc., which recently started selling Oreo-branded chocolate bars in the U.S., is a distant third.

Buffett Has History on His Side When It Comes to Candy Moats

Buffett, in an interview with CNBC on Monday, cited Snickers and M&M’s as two candy lines that are protected by a moat. The chocolate treats are two of the top-selling brands in the U.S. Closely held Mars, which makes the products, is the largest candy company with $8.4 billion in U.S. sales last year, according to Euromonitor.

To be sure, upstarts and private-label products are resonating with some customers, particularly younger ones, who’ve increasingly become less loyal to the ubiquitous brands that fill grocery stores across the U.S. But overall, candy is a tough market to crack because of difficult barriers to entry. The small profit margins in the industry also make it tricky to chase fast-moving fads, particularly when you’re trying to appeal to younger consumers, according to Asit Sharma, an analyst at the Motley Fool.

“Elon is out of his depth to believe he could compete with Buffett in candy,” he said. “It would be a time-consuming waste of resources.”

The $25 million purchase of See’s in 1972 was key for Buffett and Berkshire Hathaway. In 2015, he told shareholders the business had generated $1.9 billion in pre-tax earnings. And perhaps more importantly, he learned about brands. A few years later, he took a stake in Coca-Cola.

“The company had a huge asset that did not appear on its balance sheet: a broad and durable competitive advantage that gave it significant pricing power,” he said in a letter to investors in 2015. “That strength was virtually certain to give See’s major gains in earnings over time.”

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