Who Needs R&D When You Understand Fat?
By Holman W. Jenkins Jr.

03/25/1997 The Wall Street Journal Page A19

A year and a half ago, Warren Buffett was spotted in a Hong Kong McDonald's, and keeping him company was Bill Gates -- Bill Gates who once told Playboy, "In terms of fast food and deep understanding of the culture of fast food, I'm your man."

Inasmuch as Mr. Buffett is one of the savviest investors in Eastern Nebraska, we are obliged to the fellow who bumped into them and passed along the story to Buffett biographer Andrew Kilpatrick. Mr. Kilpatrick describes a scene not unlike the scene in "2001" when the ape picks up a jawbone and realizes that he could hit another ape over the head with it:

"Buffett made a point of the familiarity and consistency of McDonald's servings worldwide. . . . Buffett was, to some extent, analyzing the meal, as well as eating it.

"He picked up the bun a little and looked at the bun and the meat and said, `The bun is the same and the fries are the same. And the price is about the same.'"

We don't know if he threw the bun triumphantly in the air.

Mr. Buffett shrouds his moves in secrecy in order to preserve the proprietary value of his inspirations. Only thanks to the SEC have we been able to track his accumulating stake in McDonald's, now worth $1.3 billion, some 4.3% of the company. Strange, because McDonald's would seem to be in violation of many of Mr. Buffett's precepts of good investing.

He likes a company with an unassailable franchise, yet McDonald's own internal studies show consumers think Wendy's and Burger King deliver a better burger. He likes a product you can mercilessly raise the price of, but McDonald's has been reduced to running a Blue Light special on Big Macs in hopes of luring waddlers through the door.

He likes an organization where everyone paddles in the same direction. Yet McDonald's and its franchisees have fallen out over its strategy of hydrogenating every strip mall and major intersection with Golden Arches.

Mr. Buffett likes a company with focus, but lately McDonald's has been chasing adults, wherefore its strength has always been kids.

Of all of Mr. Buffett's precepts, though, what attracts him most is a business so divinely in sync with God's plan that even management can't screw it up. And woe betide anyone who gets between a Hong Kong teenager and the McDonald's counter.

It was once argued that the lactose-intolerant, beef-averse, cheese-hating Chinese would never go for American burgers and fries. In the most marketable discovery of all time, it turns out Asians endured the same Pleistocene conditioning as the rest of us, and are no less programmed to crave and store fat as proof against famine.

Since McDonald's arrived in Hong Kong, the average weight of a local teenager has risen 13%. And one of the best indexes of dietary change, the age of girls at menarche, has dropped to 12, compared to 17 on the mainland. (Justice Duffy of the Hong Kong bench recently scandalized the community by telling one statutory felon: "You've pleaded guilty to unlawful sexual intercourse with a girl of 13, which we should all regard as a serious matter, although it's obviously not regarded as such by the 13- and 14-year-olds of this world.")

The territory also has the second highest childhood cholesterol levels in the world after Finland.

Now consider that, of some 20,000 McDonald's outlets on the planet, 25 of the top 50 in sales are in Hong Kong. Coincidence?

In Japan, per-capita intake of dietary fat has tripled in the last 25 years, during which time McDonald's has gone from zero to 2,000 restaurants; it expects to hit 10,000 in another decade. The company has just begun pushing into China, where 200 million teenagers take aboard only 25% as much dietary fat as the typical American. Ask how many calories to fatten them to Hong Kong's level, and you have the McDonald's opportunity.

Saddening though it may be to nutritionists, there is little precedent for a society emerging from scarcity to affluence and spurning the lure of higher-fat foods. And fat, the most beguiling and sensual of all food properties, is the essence of McDonald's business.

Fat tastes like nothing, but the flavor of everything from garlic to vanilla pales unless carried to the senses on a slipstream of fat. Foodologists have coined the term "mouth feel" for fat's unreplicable qualities of creaminess and moistness and chewiness.

Studies at the University of Michigan show that naxolene, a drug that blocks opiate receptors in the nervous system, reduces the desire for fat, suggesting a link between fat consumption and the release of endorphins, those natural pleasure drugs that make life worth living.

Mr. Buffett, pondering his bun, may well have noticed that the Golden Arches are no longer the only portals through which Americans may enter this heaven. Others have figured out the formula. Though the burger market continues to grow by 3.5% a year, BK and Wendy's are appropriating most of the additional trade.

Never mind: Ronald McDonald seems set to capitalize on the expanding maw for fat abroad by following the simple strategy of getting there firstest with the mostest.

McDonald's already accounts for 5% of beef consumption in Japan, and 60% of hamburger sales. A burger and fries served up in a smiling, clean, safe and predictable environment is, for Asians, who have little culinary knowledge of fat, a wonderfully unthreatening introduction to its primal satisfactions.

And such are the logistical challenges of providing the vast rivulets of fatty foods into alien lands that its rivals find it impossible to catch up, despite their technological edge -- i.e., a tastier burger than even McDonald's, with its vast R&D, has been able to devise.

In our own country, what is merely too much of a good thing tends to be transmuted by killjoys into a great and satanic evil. So it has been with fat, especially when fed to kids.

A pile of evidence, though, has failed to find any link between fat consumption in children and clogged arteries and strokes at the far end of life. That hasn't stopped some parents from projecting their arterio-paranoia on their kids and depriving them of the fat they need for proper growth.

Not so children of more advanced years. Messrs. Buffett and Gates were also seen at a Beijing McDonald's, where Mr. Buffett cashed in some coupons. His fans will want to keep a watch on that Big Mac habit of his.

Mr. Buffett invests for the long term, but is he a long-term investor?