Warren Buffett parlayed a $600 million bet on Gillette into owning Duracell. Here’s the story of how he swapped a razor wager for a battery giant.

warren buffett
Warren Buffett

• Warren Buffett’s Berkshire Hathaway plowed $600 million into Gillette in 1989.

• The investor’s company swapped its stake for over $4 billion of Procter & Gamble stock in 2005.

• Buffett used the P&G shares and some cash to buy Duracell in 2014.

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Warren Buffett turned $600 million into more than $4 billion by betting on Gillette, then parlayed his stake in the razor company into acquiring Duracell. Here’s a look at the investor’s famous bet on one of his favorite businesses, and how he squeezed value out of it again and again.

Betting on blades

Buffett’s Berkshire Hathaway conglomerate bought $600 million of Gillette’s preferred stock in 1989. The shares paid a 8.75% dividend, had to be redeemed after 10 years, and could be converted into common shares at $50 a share. Buffett also joined the personal-care company’s board.

“Gillette’s business is very much the kind we like,” he wrote in his letter to Berkshire shareholders that year. The company’s strong brand, lion’s share of the razor-and-blades market, focus on everyday products, and the simplicity of its business model undoubtedly appealed to him.

Read more: Warren Buffett has a $80 billion headache when stocks and businesses are this expensive. Here’s a look at the investor’s big dilemma – and the unhappy compromise he’s made.

Gillette called Buffett’s preferred stock in 1990, exchanging it for 12 million common shares instead, representing an 11% stake in the company. The investment quickly paid off; along with Coca-Cola, it accounted for nearly $1.5 billion of the $2.1 billion increase in Berkshire’s net assets in 1991.

“Coca-Cola and Gillette are two of the best companies in the world, and we expect their earnings to grow at hefty rates in the years ahead,” Buffett told investors that year.

Buffett loves the razor business

Buffett trumpeted Gillette’s dominance in his 1993 letter, noting it commanded a 60% share of the global market. Berkshire’s piece of the company effectively gave it a 7% share of the world’s razor-and-blade revenues, he told investors a year later.

“The might of their brand names, the attributes of their products, and the strength of their distribution systems give them an enormous competitive advantage, setting up a protective moat around their economic castles,” the investor said about Gillette and Coca-Cola.

In his 1995 letter, Buffett bemoaned being “far too clever” when he bought Gillette’s preferred stock instead of common stock. Berkshire would have been $555 million better off if he had kept things simple, as his stake would be worth an extra $625 million, at the cost of only $70 million in dividends.

Buffett’s praise of Gillette peaked when he branded it one of “The Inevitables” in his 1996 letter. “No sensible observer – not even these companies’ most vigorous competitors, assuming they are assessing the matter honestly – questions that Coke and Gillette will dominate their fields worldwide for an investment lifetime,” he said.

Read more: Warren Buffett is hoarding $80 billion of cash, cleaning up his stock portfolio, and declining to bash bitcoin. Veteran investor Thomas Russo says why that strategy will ultimately pay off.

The billionaire also explained why he preferred reliable, established companies to technology startups or smaller industrial businesses. “I would rather be certain of a good result than hopeful of a great one,” he said.

Buffett’s Gillette stake mushroomed to $4.8 billion in 1997. He delved into why he liked the company at Berkshire’s annual shareholder meeting that year. He argued that Gillette benefits as people move up the “comfort ladder” in shaving, and they’re unlikely to go down a rung.

“If the difference between having great shaves and very so-so shaves, and lots of nicks and scratches and everything, is 10 or 12 bucks a year – that is not going to cause many people to change their habits,” he said.

The Berkshire chief also highlighted that Gillette’s Sensor razor for women had expanded the market.

“I would not have guessed that would work that well,” Buffett said. “Before that, all the women just used the disposables, or their husband’s or boyfriend’s razor. But thank God they’ve gotten over that.”

Buffett revisited the subject during the 1998 meeting. “It is a plus to have products such as Gillette has or Coke has, that have demonstrated the fact that they travel extraordinarily well around the world – people crave those products,” he said.

“No one’s going to find a way to do it better than those two companies in their respective fields,” he continued. “And they sell an inexpensive product, so all of that’s going for us.”

Buffett added that as people’s disposable incomes grow, they upgrade to Gillette products for a better and more enjoyable shaving experience.

The investor also emphasized the power of Gillette’s brand moat. Everyone knows what the company does and how much money they could make by copying it, but nobody has succeeded in knocking it off and eroding its 71% share of global razor-and-blade sales, he said.

Swapping razors for batteries

Gillette’s phenomenal success spurred Procter & Gamble to buy the company in 2005. Berkshire received 0.975 P&G shares for each of its Gillette shares – worth $4.3 billion at the end of 2004. It also purchased additional P&G stock to build a holding of 100 million shares, or a 3% stake in the packaged-goods group. The position cost it $940 million, and it was worth $5.8 billion at the end of 2005.

However, Buffett and his team trimmed their P&G stake in 2008 and 2009 as they wanted more cash to fund their investments in Goldman Sachs, General Electric, and other cash-hungry companies during the financial crisis.

The investor’s next move was buying Duracell in 2014. Gillette had acquired the battery business in the late 1990s, meaning it was now under P&G’s ownership.

Buffett exchanged his $4.7 billion of P&G stock and $1.8 billion in cash for Duracell. The deal meant he avoided the capital-gains tax he would have owed by selling his stock. It also secured Berkshire another operating business, which Buffett generally prefers to a portfolio holding.

Duracell was struggling when Berkshire bought it, and it has required substantial time and money to whip into shape. However, Buffett was on Gillette’s board when it bought Duracell and has witnessed what it can do when run properly, he said at Berkshire’s 2018 meeting.

“Duracell should be earning more money than it is now, and will be,” he added. “It’s well on its way there.”

Buffett also has no regrets about swapping his P&G stock for the company. “I like the Duracell deal absolutely as well as when we made it,” he said.

Berkshire still owns about 315,000 P&G shares – a stake worth $43 million at the last count. Buffett continues to own a piece of Gillette as a result, and probably looks back fondly on how he turned a bet on the razor maker into another multibillion-dollar business for his collection.

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Diaper prices were already soaring and now 2 diaper giants just announced they’re about to get even more expensive

baby diapers baby products
  • Two major diaper manufacturers said they are increasing prices.
  • Diaper prices already rose nearly 10% over the past year.
  • Most consumer goods are becoming more expensive because of supply chain disruptions.
  • See more stories on Insider’s business page.

Diapers are about to get even more expensive, and parents are worried.

Prices of furniture, household necessities, electronics, and nearly all other consumer goods are set to rise this year in a “perfect storm” of shipping delays, supply chain disruptions, and changes to demand because of the pandemic.

In an April earnings call, Proctor & Gamble said that it has already started raising prices of some household goods, including diapers. Further price increases will be added in September in the “mid-to-high single-digit percentages,” the company said.

Read more: A third-party seller whose baby-care business raked in $20 million in sales last year reveals his secret to selling on Amazon, Walmart, and Target

“This is one of the bigger increases in commodity costs that we’ve seen over the period of time that I’ve been involved with this, which is a fairly long period of time” Proctor & Gamble operating chief Jon Moeller said of his 33-year career.

Kimberly-Clark, the producer of Huggies diapers and Pull-Ups, also announced plans to raise prices. Increases in the mid-to-high-single digits will take effect in June, The Wall Street Journal reported.

Diaper costs rose 8.7% over the 12-month period ending on April 10, CNN reported. Further increases are likely to put additional financial pressure on low-income families. One in three US families had difficulty affording diapers before the pandemic, according to the National Diaper Bank Network. In 2020, the organization distributed 100 million diapers, a 67% increase over the previous year. Federal assistance programs like SNAP and WIC cannot be used for diapers, furthering the need.

Extreme congestion at ports is partially to blame for the increase in diaper prices. Ships carrying millions of dollars of imports are stuck waiting weeks to unload, leading to shortages and long waits. A global shipping container shortage is also making the process more expensive as container costs have tripled over the past year.

Diapers are far from the only products affected as consumers continue to spend money on goods over services. Bikes, cars, meat, cheese, and even ketchup are all becoming more expensive. Goldman Sachs analysts predict that increased prices will continue through at least the end of 2021 as the supply chain continues to grapple with disruptions and unpredictable demand.

Do you have a story to share about a retail or restaurant chain? Email this reporter at mmeisenzahl@businessinsider.com.

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The elite’s favorite status symbols have become way more expensive over the past 20 years

wealthy person
The elite have turned towards investing in education and health as a means to flaunt their riches.

Showing off wealth is no longer the way to signify having wealth.

Flashing a Louis Vuitton handbag or a multimillion-dollar Bugatti have long been standard status symbols for the elite, but the ultrawealthy have increasingly turned to intangible investments such as security and health to discreetly flaunt their wealth instead. An unlikely reflection of this transformation is the recent history of inflation in the US economy.

Consider American Enterprise Institute’s famous inflation chart, which was once dubbed by Bloomberg as “The Chart of the Century” and has made the rounds on various media platforms throughout the years.

The latest iteration, featured below, shows 54.6% overall inflation over the last 21 years, which works out to an annualized compound growth rate of 2.2%, very close to the Federal Reserve’s stated inflation target.

But as you can see, some services and goods have become way more expensive than others.

AEI
Services have grown more likely to become more expensive over time than material goods.

 

Hospital services, college tuition, medical services, and housing have seen disproportionate upticks past the average 54.6% inflation. Their costs have outpaced the hike in average hourly wages, which have shot up by 82.5%, or 28% more than the average increase in consumer prices.

Meanwhile, consumer goods such as new cars, clothing, computer software, toys, and TVs have become more affordable.

In a nutshell, it seems that the cost of intangible services (with the notable exception of housing) has increased while the cost of material goods has decreased, mirroring the shift from conspicuous to inconspicuous consumption.

The rise of discreet wealth

Inconspicuous consumption is a growing trend among not only millionaires and billionaires, but “the aspirational class.”

Elizabeth Currid-Halkett coined the term in her 2017 book, “The Sum of Small Things: A Theory of the Aspirational Class,” as the opposite of “conspicuous consumption,” a term conceived by 19th-century economist Thorstein Veblen referring to the concept of using material items to signify social status.

In the US in particular, the top 1% have been spending less on material goods since 2007, Currid-Halkett wrote, citing data from the US Consumer Expenditure Survey. In an era where mass consumption means both the upper class and the middle class can own the same luxury brand, she explains, forgoing material goods for immaterial means is a way for the rich to differentiate themselves.

“This new elite cements its status through prizing knowledge and building cultural capital, not to mention the spending habits that go with it,” Currid-Halkett wrote, adding, “Eschewing an overt materialism, the rich are investing significantly more in education, retirement, and health – all of which are immaterial, yet cost many times more than any handbag a middle-income consumer might buy.”

That inconspicuous consumption often goes unnoticed by the middle class – but getting noticed by a fellow elite is the appeal of the discreet. Investing in things like education, health, and childcare – which have all become more expensive since 2000, per the AEI chart – “reproduces privilege” and “offers social mobility” in a way that flaunting luxury couldn’t, according to Currid-Halkett.

Discreet wealth is just one of many inflation factors

Now, this isn’t to say that discreet wealth is the sole cause of inflation in the US.

Mark Perry, the AEI economist behind the chart, notes in his blog post that economists have attributed several reasons to these trends: Price increases correlate with a greater degree of government involvement in a good or service (like health care) and prices decrease as the degree of international competition for goods increases (like toys).

Mass production has enabled manufactured goods to become more affordable. And college has become more expensive for many reasons, including increasing globalization, increases in financial aid, and ballooning student services.

But the fact that the inflation chart correlates with the rise in discreet wealth indicates the power of demand in driving up prices – and the spending power of the elite as wealth inequality worsens in developed economies.

The more the elite covet sending their kids to high-end preschools and Ivy League colleges, or spending millions to live within walking distance of the country’s best public elementary and secondary schools, or buying their kids boutique healthcare as a way to signify status, the more expensive those industries are going to become.

Call it discreet inflation. 

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