Monday, February 8, 2010

Charlie Munger: Nebraska Furniture Mart

Charlie demonstrating the utility of simple microeconomics during a talk he gave to the University of California, Santa Barbara Economics Department in 2003.

"Berkshire Hathaway just opened a furniture and appliance store in Kansas City. At the time Berkshire opened it, the largest selling furniture and appliance store in the world was another Berkshire Hathaway store, selling $350 million worth of goods per year. The new store in a strange city opened up selling at the rate of more than $500 million a year. From the day it opened, the 3,200 spaces in the parking lot were full. The women had to wait outside the ladies restroom because the architects didn’t understand biology. (Laughter). It’s hugely successful.

Well, I've given you the problem. Now, tell me what explains the runaway success of this new furniture and appliance store, which is outselling everything else in the world?

[Pause]

Well, let me do it for you. Is this a low-priced store or a high-priced store? (Laughter). It's not going to have a runaway success in a strange city as a high-priced store. That would take time. Number two, if it's moving $500 million worth of furniture through it, it's one hell of a big store, furniture being as bulky as it is. And what does a big store do? It provides a big selection. So what could this possibly be except a low-priced store with a big selection?

But, you may wonder, why wasn't it done before, preventing its being done first now? Again, the answer just pops into your head: it costs a fortune to open a store this big. So, nobody's done it before. So, you quickly know the answer. With a few basic concepts, these microeconomic problems that seem hard can be solved much as you put a hot knife through butter. I like such easy ways of thought that are very remunerative. And I suggest that you people should also learn to do microeconomics better."


While Charlie doesn't mention it in the above talk, the team that manages Nebraska Furniture Mart has also developed a significant cost advantage over the years. Warren Buffett put it the following way in his 1983 letter:

"One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it. I'd rather wrestle grizzlies than compete with Mrs. B and her progeny. They buy brilliantly, they operate at expense ratios competitors don't even dream about, and they then pass on to their customers much of the savings." - Warren Buffett

So some of that cost advantage comes from scale but much of it is successful buying and other operating practices that go back to the founder, Mrs. B.

Adam

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
 
Site Meter