Buffett's Achilles' heel: Retail investing

The sector continues to confound the billionaire investor and partner Charlie Munger. They have bemoaned their bad luck for years.

By MSN Money Partner Jul 17, 2014 1:05PM
Caption: Billionaire investor Warren Buffett
Credit: © Nati Harnik/APBy Anupreeta Das, The Wall Street Journal

To Warren Buffett, it is the one area where he says his investing track record is "awful," "pretty bad" or "really bad."

Berkshire Hathaway's (BRK.A) tiny gaggle of retail businesses -- from See's Candies to Ben Bridge Jeweler and Nebraska Furniture Mart -- gets little attention from investors and analysts, and the companies are profitable.

But the retail sector continues to confound the billionaire investor and his partner Charlie Munger. They have bemoaned their bad luck in retail investing for years, speaking about their retail "failures" at annual meetings and in interviews. More recently, the duo -- famously averse to technology bets -- have lamented how the Internet is rapidly reshaping shopping habits and affecting Berkshire-owned retailers in ways they didn't expect.

At Berkshire's annual meeting in May, Mr. Munger singled out the retail business as one under threat. "I think the new technology is going to be very disruptive . . . retailing in particular is facing major threats," he said.

That's a lot of air time for nine businesses that account for 2 percent of Berkshire's $182 billion in annual revenue and shows how conscious Mr. Buffett is of the rare blemish on his lauded investing record.

The 83-year-old, who built Berkshire, based in Omaha, Neb., into a behemoth with $316 billion in market value, declined to comment.

Mr. Buffett's difficulties in retail date to Berkshire's early years. In a 1989 investor letter, he called a 1966 deal to buy Baltimore department store Hochschild Kohn one of the conglomerate's biggest mistakes to that point.

Mr. Buffett has said that retail is challenging because shopping habits and sales channels are constantly changing, making it difficult for businesses to build and maintain competitive advantages, or what he calls "economic moats." Over the years, Mr. Buffett has bought a collection of small retail companies that appeared to have at least some protection but, thanks to the Internet, those moats are in danger of drying up.

Like many other investors, Mr. Buffett apparently didn't anticipate "this seismic technological change," that would roil the retailing industry, said David Kass, a Berkshire shareholder and professor of finance at the business school at the University of Maryland, College Park.

Just as he savages his own record, Mr. Buffett is effusive about someone who he believes figured it out years ago: Amazon's (AMZNJeff Bezos.

Last year, when Mr. Bezos was negotiating to buy the Washington Post from Graham Holdings (GHC), Mr. Buffett, a longtime adviser to the Post, told Chief Executive Don Graham that Mr. Bezos was the "best CEO in America," according to comments Mr. Graham made at the time. More recently, Mr. Buffett called Mr. Bezos "ungodly smart."

Consistent with his hands-off ownership style, there is no indication Mr. Buffett is pressing his managers to be more Amazon-like.

Still, several said they are taking steps to ward off online interlopers and pick up business outside traditional channels.

Brad Kinstler, who heads See's Candies, said the company is unveiling a new website in early 2015 and has stepped-up its social-media presence.

"We're addressing how the customer wants to shop," whether it is ordering online and picking up in a store or having it delivered, Mr. Kinstler said. E-commerce is only about 5 percent of See's overall $400 million in sales but is growing quickly, he said.

Ed Bridge, co-CEO of Ben Bridge Jeweler, said the mall-based retailer is sharply increasing its digital marketing efforts to partly offset a "drop-off" in foot traffic at malls serving middle- to low-income shoppers.

In 2007, eight Berkshire retailers accounted for $3.4 billion in sales and $274 million in pretax profit. By 2012, revenue rose 8 percent to $3.7 billion and profit rose 11 percent to $306 million. The retail group saw a meaningful jump in revenue and earnings last year primarily due to the 2012 purchase of Oriental Trading, an Omaha-based seller of discount party supplies, Berkshire said.

Mr. Buffett hasn't talked in detail about how the Internet is affecting his retail companies, but in his 2013 annual letter, he said some companies in Berkshire's manufacturing, service and retail group "have very poor returns, a result of some serious mistakes I made in my job of capital allocation. I was not misled; I simply was wrong in my evaluation of the economic dynamics of the company or the industry in which it operated."

Even Berkshire's record of stock investments in retailers is mixed: While big bets in Wal-Mart (WMT) and Costco Wholesale (COST) have paid off, Berkshire has cut its stake in U.K. supermarket chain Tesco PLC as it struggles with market-share losses.

Berkshire's four home-furnishings brands -- Nebraska Furniture Mart, R.C. Willey, Star Furniture and Jordan's -- are a bright spot in its retail group. With two stores and a third scheduled to open in Dallas next year, discount retailer Nebraska Furniture Mart raked in about $900 million in sales last year, a jump of 12.5 percent from 2012.

Despite their success in local markets, "it's hard to see how Berkshire's [furniture] brands don't feel pressure in five, 10 or 15 years" from online rivals, said Matt McGinley, a retail analyst at ISI Group.

Jul 17, 2014 4:31PM
I would have to say that Warren Buffett's Achilles heel is his age, all the rest are just bumps in the road, it's the Big Dead End ahead that really matters. He's 83 so in the next ten years he'll likely either lose his mind or his life and that will effect Berkshire Hathaway's stock price more than anything that happens in the markets or with their other investments.
Jul 17, 2014 3:24PM

the Keystone Pipeline!

it would take away his huge income block from owning the BNSF railway the only current method of getting Canadian crude to texas...

Jul 17, 2014 2:00PM
james54....What the hell does any of that dribble even mean.?? Sweet geezus, man.
Jul 17, 2014 3:21PM
'it's a vulture culture,living off the fat of the land'.-The Alan Parsons Project.
Jul 17, 2014 2:01PM
eTail is now king, retail stores are just showrooms except for drug, grocery and home improvement.
Jul 18, 2014 1:52AM

The Keystone pipe, is the Keystone XL....Extensions and shortcuts for the existing Keystone...

Don't really believe Buffet's or BERK's railroad will be hurt one bit, the BNSF hauls a lot of stuff besides oil...The RR is a stopgap for picking up some slack though..

And was probably bought for the sense of a Recovery, and the rail business would be picking up.

It is and it has, many more loads going down the tracks...

Along with that Buffet probably got a good price on the Deal...He usually does.

On top of that Buffet has investments in the Tar Sands of Canada, so a Keystone X might help him also, along with the upper Bakken fields (oil patch) mostly in Dakota.

The Keystone XL is being held up once again in the Nebraska's Courts, by Nebraskans..

Not Buffet nor Obama...Do some research please.

The U.S. State Dept. has cleared it's investigation as a go, and maybe late this Winter or early Spring...The US Gov. or the Administration will give go ahead..?? All up to Nebraska right now.

The pipeline work will require about a 1000 workers to complete everything, then the workforce is down to about 40-50 permanent workers to maintain it...All good paying jobs.

Jul 17, 2014 1:58PM

Well Warren and Charlie....let me give you a little advice....yuk, yuk.

We got pretty much out of Retail over the past year or so.

Exception; Walgreens(WAG) and a Pet Supply Company. (e-Tail)

WAGs is on every Street  corner, everyone needs drugs (many baby boomers coming of age).

And people are starting to spend more on their Pets then on kids...Or they don't have Kids.

Glad we did...

Jul 17, 2014 2:52PM
I thought Buffet was supposed to be smart with his money,he just bought a new caddy,worst investment he will ever make.
Jul 17, 2014 1:20PM
anybody can do good with so much help from Obama inflating amazon stock with people's money from colluded bail out banks.amazon can sell at depredatory prices because owner don't need to make money because he makes billions a year selling options and inflated stocks.its unfair and not a level playing field for brick and mortar retailers.obama is lawless and corrupted.anyway buffet  is getting old.Before buyoing retailers he should have take advice that is not possible to compete with government subsidided retailer amazon.second should have get advice with oil engineer who would have told him cheapest and safer way to transport oil is by pipeline and not railroads
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