Friday, September 05, 2014

Berkshire Hathaway: Wholesaler of Death?

 Now that we have your attention with that admittedly provocative title, we are going to kill two birds with one stone here.
 Bird One is the fact that we haven’t posted anything in two months, mainly because whatever odd silliness visible in the darker corners of Wall Street seems irrelevant in a world where Vladimir Putin can invade his neighbors, take territory and shoot passenger planes from the sky while the civilized world sputters about such things not being fit for 21st Century-type behavior before moving onto actual 21st Century-type behavior like Tweeting about how sad it is that Joan Rivers died.
 Bird Two is something I’ve always wondered about when it comes to Berkshire Hathaway.
 But before getting to that, let me repeat, for the record and as I have said early and often in books, speeches and as a talking head, that Berkshire Hathaway is the product of the single best 49 ½-year investment track record that anyone in our lifetimes will likely ever witness, bar none. 
  Now, I have met a lot of conspiracy theorists since writing “Secrets in Plain Sight” who claim that Warren Buffett is either a) just plain lucky (“he was born at the right time”), or b) not really all that great (“you could have done better with a leveraged bond fund,” e.g.), or c) a beneficiary of his left-wing political connections (“the Keystone Pipeline isn’t being approved because it would hurt Berkshire’s railroad”), or d) just such a lousy rotten hypocrite that who cares what his track record is?
 But none of them (or anybody else, for that matter) has ever, never, not once brought up the actual fact that Berkshire Hathaway is, as best anybody can tell, the largest cigarette dealer in the United States (outside of the tobacco companies themselves), thanks to its ownership of McLane Company, the giant wholesaler that Buffett acquired from Wal-Mart in 2003.  
 The precise extent to which Berkshire Hathaway shareholders (your editor included) benefit from supplying smokes to addicts around the world (McLane has operations in other countries as well as the U.S.) are hard to come by, but, big picture, we know that a) McLane is the largest distributor of smokes, gum, candy and food to convenience stores in America, and that b) convenience stores are the largest source of smokes to cigarette addicts in America, which would mean Berkshire Hathaway owns what is very likely the biggest wholesaler of smokes (not to mention the kind of chewing tobacco that recently killed Padres great Tony Gwynn) in America.
  And despite all the efforts of government and regulators to end it, the tobacco business remains a very big business indeed.
 In fact, a press release on the McLane web site (copped from something called “Convenience Stores Decisions”) notes that $52 billion worth of cigarettes were sold at convenience stores in 2012, amounting to 8.75 billion smokes. 
 And while both figures were down slightly from the previous year according to the same report, its authors noted approvingly that “visits to the c-store [convenience-store] by tobacco customers remains [sic] strong, and that provides a steady opportunity to boost the market basket.”
 So the next time people flip out about Warren Buffett making a perfectly rational decision to invest Berkshire’s money in a highly profitable tax-inversion deal despite his long-standing opposition to the use of tax-aversion strategies by others (as they did a couple of weeks ago during the Burger King-for-Tim Horton hysteria), ask them whether it’s really as bad as making money wholesaling a highly addictive, cancer-causing, birth-defect-causing and emphysema-causing product by the billions to people who really can’t afford it to begin with?
 And the next time you run into one of Berkshire’s “comfortably numb” shareholders—to cop an old Pink Floyd label—ask them when are they going to stop doing it?

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2014)    $2.99 Kindle Version at

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The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.


Anonymous said...


First, I love your blog. Thank you for your hard work.

A question:
If we place heavy blame on the distributors of cigarettes, then it seems like we also have to place heavy blame on the c-store operators and the c-store customers who help keep the c-stores in business.

Personally, I often stop at convenience stores for a snack or for gas. I am helping to keep the convenience store in business, which allows it to continue selling cigarettes. Am I to blame for cigarette deaths? Why is my implicit support of convenience stores different from the distributors who support convenience stores by shipping goods to them?

I've thought about this a lot, and don't have a great answer. I'm curious to hear your response.

Tom L

Kim Rampling said...

You raise some very interesting points that seemed to have met by a deafening silence. Fault of yours, now rare (er) posting or those not wishing to offend greatness?

Jeff Matthews said...


Great question, but I think your example flips the responsibility on its head. You are not implicitly supporting the c-store's sale of tobacco by purchasing other products. You're the innocent bystander.

The c-store operators are selling the tobacco, so they're the arms dealers. The wholesalers supply the arms (and other products), so they're enabling the arms dealers, and making a profit doing so. You simply happen to be buying non-lethal materials sold by the arms dealers

If you owned the c-store, or owned shares in a publicly traded c-store, then you'd have an ethical issue--if you cared about it.

That's how I see it.



Anonymous said...

Who makes the most profit from cigarettes? Probably government, don't you think? The taxes outweigh the base retail price in most states.

Jeff Matthews said...

Oh but the cigarette taxes go to good causes, like, anti-smoking messages!


Rich said...

Great article...glad you're back! Couldn't the same stance could be made against anything that a person disagrees with, whether it's tobacco, alcohol, or hot dogs? Smoking is legal...If every person stopped smoking OVERNIGHT then I bet the same bureaucrats that want people to stop smoking would start immediately complaining about the impact to their budget...

Anonymous said...


This is a pretty ridiculous article. It's Berkshire's fault cigarette makers manufacturing cigarettes and consumers (knowing they cause significant personal harm) consume cigarettes? Berkshire at best is a middle-man in this situation. Next you'll be blaming Boeing for selling government's aircraft that are used in wars that kill innocent people. And if Berkshire were to invest in Boeing (or any other defense manufacturer) it would be Berkshire's fault that war in the world is taking place. Should nobody invest in companies like McLane, Boeing, Smith & Wesson, etc.?


Kurt Shrout said...


I don’t usually read your blog; but there was a link to the above piece on Abnormal Returns (AR), and the AR description of the piece (i.e., “Berkshire Hathaway is the largest cigarette dealer in America.”) captured my interest. For one, it seems to me that cigarettes are just one of many things that McLane wholesales. In other words, it is not like McLane is focused on the cigarette business. For another, if McLane and Berkshire are doing something unethical by being involved with cigarettes, so are the c-stores, as you have said, other stores that sell cigarettes, many warehouse businesses, many trucking businesses, many railroad businesses, many sea shipping businesses, many businesses that insure cargo being transported, many fuel stations (whether they have an associated c-store or not), many ports, many store display consulting businesses, financial institutions and investors that provide funding to or invest in any of the aforementioned businesses (even if the investor is just doing it via an index or other more general fund), etc.

The way America (and almost all, if not all, of the world) works is that, with certain things, like cigarettes, cigars, chewing tobacco, the overconsumption of alcohol, etc., people basically have the right to poison themselves. The trick is to establish the system so that, without having more rules than is warranted (you want simple, inexpensive solutions, versus complicated, expensive ones), the people poisoning themselves pay a fair cost for their behavior (e.g., via higher health insurance rates) and for educating themselves and others about the dangers of their behavior (e.g., via taxes specific to the products). The other option is for society to simply agree in majority that the product will no longer be sold; but, then, you may have too great of an issue with illegal production and/or sales.

The further away you get from businesses that focus on harmful products (like the cigarette companies themselves), the more your issue is with society and/or its systems, and the less it is with the business. Even investing in a cigarette company may be ethical if your social stance, your campaign contributions, and your vote are in the direction of eliminating them or sufficiently reducing their harm. Unfortunately, almost no one is ethical enough to go against their own financial interests when and to the extent they should.

By the way, if you really care about right and wrong, you should learn a lot more about the situation in the Ukraine before you write about it. This is rather difficult to do because our press is replete with misinformation on this topic (and many other topics), but it is somewhat doable. If you are interested, read this ( blog by me for a small indication of how different the situation is than is generally stated and believed. The Ukraine situation is discussed some in paragraphs 8-12.

Anonymous said...


Thanks for the thoughtful reply.

To continue your arms-dealer analogy: Are the employees who work for the arms-dealer bad people? After all, the employees are actually taking the cash in exchange for cigarettes?

Personally, I think that if I am going to assign blame to c-store owners, then to be consistent I also have to assign some blame to the c-store customers, employees, distributors, etc. After all, the arms-dealer does not exist in a vacuum. The arms-dealers depends on a host of others to support his existence, including me as a customer.

I'm guessing no one is going to change the other's mind on this one. We'll just have to agreeably disagree.

Again, overall I love the blog.

Tom L

Unknown said...

Of course, BRK also burns a large amount of fossil fuels in their utility operations and transports a HUGE amount of coal at BNSF.

The social costs of these operations could dwarf deaths caused by smoking. (As you've pointed out in the past, the climate is clearly changing)


It's legal, it's popular, get over it.