Warren Buffett (Trades, Portfolio)'s acquisition of the Nebraska Furniture Mart, the largest home furnishing store in North America selling furniture today, is one of the best examples of his no-nonsense approach to deal-making in action.
After meeting the company's owner and founder, Mrs. B, Buffett made an offer for the business with a one-page handshake deal. At the age of 89, Mrs. B sold 80% of the company to Buffett and continued to manage the business on behalf of the Oracle of Omaha.
Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) paid $55.4 million for the Nebraska Furniture Mart, and it has since become a cornerstone of the Berkshire empire.
A fascinating story
The story of the Nebraska Furniture Mart is fascinating. It is the tale of a young immigrant who came to the U.S. with just a few dollars and built a business that has since produced hundreds of millions of dollars in profit. Mrs. B started the market with a $500 loan and worked flat out to make sure customers' needs were always met, and the company's products were the cheapest around.
What's even more impressive is how the business has continued to thrive as the rest of the brick-and-mortar retail industry is struggling to survive. This is something Buffett spoke about at this year's annual meeting of Berkshire Hathaway shareholders.
Responding to a shareholder who asked how Berkshire's furniture operations were doing against online retail giants such as Wayfair's "customer first, profits later model," Buffett responded by saying,t "We do a quite significant percentage of our sales online in the furniture operation. That might surprise you. We do the highest percentage in Omaha."
And while companies like Wayfair try to appeal to customers with offers like free delivery, a significant portion of the customers at Berkshire's furniture business "come to the store to pick up."
Buffett added, "So that they will order something from us online, but they don't seem to mind at all ... and they don't have to do it ... but they get a pick up at the store." The CEO of Berkshire went on to say that the company is learning "about customer behavior as it unfolds."
Unlike so many other online retailers, which are accumulating huge losses while trying to attract and retain customers, Berkshire's furniture operations have been profitable from virtually the very beginning. As Buffett described:
"On Tuesday we did $9.2 million or $9.3 million of profitable volume at the Nebraska Furniture Mart. And I think that company had paid-in capital of $2,500, and I don't think anything's been added since. So, it's working so far."
By keeping costs low and not chasing growth at the expense of profits, Nebraska Furniture Mart has been able to produce a healthy level of net income year after year.
A repeating pattern
This is something we see again and again with Berkshire's businesses. See's Candies is another excellent example. These businesses could spend tens of millions of dollars trying to expand into new markets (possibly more with Berkshire's balance sheet behind them), but they don't.
Instead of trying to expand, these businesses focus on what they know best, sticking to the markets where their presence is best known and profits virtually guaranteed. The profits are then sent up to the Berkshire holding company where Buffett can invest them in other companies.
There's a lot to be said for this model. There are hundreds of examples of companies that have tried and failed to expand outside their home market, and the expansion often proves to be terminal if the business borrows more than it can afford.
Conservative, profitable growth isn't exciting, but as Buffett's model shows, it does work over the long term. Companies that focus on what they know best, and don't overstretch, can be highly successful over the long term.
Disclosure: The author owns shares in Berkshire Hathaway.
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