Berkshire Hathaway 2009 Annual Meeting Audience Question # 28

GEICO has spent a lot, and will keep spending a lot, on advertising

Warren Buffett:

Becky?

Becky Quick:

This is a question from someone named Yem in Columbus, Ohio. It’s…

Warren Buffett:

That narrows it down.

Becky Quick:

Yeah. Very company specific. It says, “GEICO has been spending around 400 to $600 million on media advertising a year in the last few years. What are the deciding factors into how much to spend? And how could one estimate the net return on such spending?”

Warren Buffett:

Well, that’s a question people have been asking themselves since the beginning of advertising.

And, you know, I’m not sure whether it was Marshall Field or John Dorrance at Campbell Soup, or something, one of those fellows said that, you know, when asked whether they didn’t waste a lot of money on advertising, he said, “Yeah, we waste half of it, but we don’t know which half.”

And that is the nature of advertising. Although, we can measure it better with GEICO than most companies.

We will spend about $800 million on advertising. We spend far more… even though we’re the third largest company… we’ve spent far more than State Farm or Allstate. And we will spend more and more and more. I mean, we will never stop.

We were spending $20 million a year, a little over that, when we bought control of it in 1995.

But we want everybody in the world to… well, everybody in the United States. We’re not going to be selling insurance in China or someplace very soon.

But we want everybody in the United States to have in their mind the fact that there’s a good chance they can save money by picking up the phone or going to geico.com and checking it out. And important money.

And when we get that message in people’s minds, you never know when it’s going to pay off later down the line. Because, as I mentioned earlier, starting in… around September 30th, we saw a big difference in the propensity of people to come to us to save $100 or $200, whereas they might not have cared about saving that before. So, we want…

Here’s auto insurance. Everybody has to buy it. Nobody likes to buy it. But they like to drive. And if you like to drive, you need auto insurance.

And so it’s going to sell. And you’re going to buy it from somebody. And if you care about saving money, you’re going to check with us. And we want to make sure everybody understands that.

And we won’t… you know, we will spend more money on it, I will guarantee you, three years from now.

Now, we’re getting more for our money in buying advertising this year. So 800 million this year buys more than 800 million would’ve bought a couple of years ago. So we’re getting more exposure for the money.

But we love spending money on advertising at GEICO. And we want to be in everybody’s mind.

Coca-Cola’s in everybody’s mind around the world. You know, he started in 1886. And they just kept associating Coca-Cola with moments of pleasure and happiness. And billions and billions of billions of people have that in their mind.

And they don’t have anything in their mind about RC Cola, you know. You know, or… they just… you say RC Cola to somebody around the globe and they give you a blank stare. You say Coca-Cola and it means something.

And a brand is a promise. We’re getting our… we’re getting that promise in people’s minds that there’s a good chance they can save money if they check with GEICO. And we’ll never stop.

Charlie?

Charlie Munger:

Yeah, it’s interesting.

If GEICO would remain more or less the same size if we didn’t advertise so healthy, and if the new subscribers are worth more than the $800 million we’re spending advertising, then, in an important sense, GEICO is earning $800 million more pre-tax in a way that doesn’t even show.

That’s the kind of thing we like to see within Berkshire Hathaway.

Warren Buffett:

The value of GEICO goes up by far more than the earnings every year, if we keep adding these people, as Charlie says.

And we could maintain, I’m sure, we can maintain for a very long time our present policy holder count and probably spend $100 million a year, maybe less.

But we are getting more than our money’s worth for the… for what we spend. We probably waste some. But overall, we’re getting at terrific return on it.

And if I thought we could get anything like the same return by spending 2 billion next year, we’d spend 2 billion. I mean, it… it’s a very attractive business. And I don’t see how you create anything like it.

I mean, we are the low-cost producer. And if you’re the low-cost producer in something people have to buy and is roughly a $1,500 item, I mean, you’ve got a terrific, terrific business. And we have durable competitive advantage there.

Looking for an offline, PDF copy of all shareholder questions carefully arranged into specific topics such as How to properly evaluate a company for potential investment, Intelligent Investing and Secrets to achieving Success and Happiness? Click on the image below to learn more.

Q&A with Warren Buffett and Charlie Munger: A Compilation of All Shareholder Questions and Answers from The Berkshire Hathaway Annual Shareholder Meetings

Click here to return to the Q&A topic list. Alternatively, you can proceed to the next or go back to the previous question.

Don`t copy text!