Thursday, April 7, 2011

Nebraska Furniture Mart: Berkshire Shareholder Letter highlights

Selling furniture may not be the most exciting business, but I find revisiting the example of Nebraska Furniture Mart from time to time is worth the effort invested.  Learning what makes NFM great has taught me a lot about what to look for in a business.

Back in 1987, Nebraska Furniture Mart was by far the largest home furnishing store. Here's some insight into what makes it unique among furniture stores from Warren Buffett's 1987 Berkshire Hathaway (BRKashareholder letter:

Net sales of NFM were $142.6 million in 1987, up 8% from 1986. There's nothing like this store in the country, and there's nothing like the family Mrs. B has produced to carry on: Her son Louie, and his three boys, Ron, Irv and Steve, possess the business instincts, integrity and drive of Mrs. B. They work as a team and, strong as each is individually, the whole is far greater than the sum of the parts.

The superb job done by the Blumkins benefits us as owners, but even more dramatically benefits NFM's customers. They saved about $30 million in 1987 by buying from NFM. In other words, the goods they bought would have cost that much more if purchased elsewhere.

You'll enjoy an anonymous letter I received last August:
"Sorry to see Berkshire profits fall in the second quarter. One way you may gain back part of your lost. (sic) Check the pricing at The Furniture Mart. You will find that they are leaving 10% to 20% on the table. This additional profit on $140 million of sells (sic) is $28 million. Not small change in anyone's pocket! Check out other furniture, carpet, appliance and T.V. dealers. Your raising prices to a reasonable profit will help. Thank you.
/signed/ A Competitor."

NFM will continue to grow and prosper by following Mrs. B's maxim: "Sell cheap and tell the truth."

The idea of NOT using all the pricing power available may not be an intuitive approach to business.

Operating at a lower cost than competitors, offering quality, and keeping the stuff you sell cheap puts enormous pressure on less efficient competitors. Contrary to what the competitor suggests in the letter above, having the lowest expense ratios then passing on most of the savings to customers ends up ultimately being a more profitable way to do business. NFM is about relentless focus on everything that influences costs while still offering desirable merchandise. Wal-Mart (WMT) is, of course, another great example of this.

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 in the 1983 letter

The original Nebraska Furniture Mart remained the largest furniture store until Berkshire Hathaway opened the Nebraska Furniture Mart in Kansas City in 2003 which, out of the gate, was selling at a rate of $ 500 million per year.

See's Candies is another business case study worth checking out (slightly different business lessons but very useful ideas when it comes to investing).

Here's a couple previous posts related to See's:

Buffett on Economic Goodwill

Buffett on "The Prototype Of A Dream Business"

Buffett explains what makes See's such an excellent business in both the 1983 and 2007 annual shareholder letters.

Adam

Long BRKb and WFC
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