I Took 20 Peking University Students to Lunch with Warren Buffett (Again). Here’s What Happened. (Pt 1 of 4)

I just had a pretty amazing day with 20 Peking University students in Omaha. We toured some Berkshire Hathaway Companies, attended a Q&A with Warren Buffett and then sat down and had lunch with him. The students are currently on their way back to Beijing – and I think they are pretty stunned.

We did a similar trip last year and I’m not going to repeat my write-up of last year. You can find that here. This write-up is more about the new Q&A and the new stuff we learned.

Arriving in Omaha.

One big difference this year was the weather. It was really cold. I actually like the snow part. But the icy wind does seem to just whip across mostly flat Omaha. Plus, I had been in Mexico City for the past week for the launch of Mobike Mexico (videos of that coming soon). Landing in Omaha was a real shock.

The students mostly stayed at the Omaha Hilton downtown, which is where the lunch was being held this year. I was just across the river in Council Bluffs. I’ll skip the really stupid part where I thought walking across the bridge would be a good idea.

A couple of quick thoughts on being back in Omaha.

  • I just really like the American Midwest. People are so friendly. Things move kinda slow. And I find myself talking up taxi cab drivers, hotel clerks, convenience store staff and pretty much everyone I meet. I find I am just much friendlier in Omaha, which is probably a needed improvement.
  • Speaking of convenience store, I did wander in and was shocked. Everything was super-sized. I mean everything. The candy bars, sodas, beers, slurpees, microwave burritos, and so on. Everything was huge. Note: the obesity rate for American women is now like 43%. It’s like 35% for men now. That’s pretty crazy.

Ok. Back to the trip.

Early morning on Warren Buffett Day

As this was our second trip, I’m now calling it “Warren Buffett Day”. And really if there is a flag day, why can’t there be a Warren Buffett day.

I woke up at 6am, drank and big coffee and took a shuttle over to the Omaha Hilton. And as this was Omaha, I chatted up the shuttle driver. It turns out he has 5 kids and is on call for the shuttle 24 hours a day. I felt pretty guilty for most of the ride.

At the Hilton, I started herding up students as they appeared. Honestly, I think I came across as some sort of giddy fool.

A bit about our students. Peking University actually chooses them. There was an informational meeting in like November and we laid out the plan for the trip. There was interest by like 200 students(?) and they had to then submit written applications and do in-person interviews with admin and faculty. The school chose 10 men and 10 women and they were from the MBA program, the Master of Finance program and undergrad program. And really, they are just a really cool group of folk.

And is common for Chinese student groups, they were crazy organized. They have had a Wechat discussion group going for months. They set up a gift committee to find a good gift for Warren Buffett (It ended up being a nice version of the game Go). They also set up a transcription committee to write down the Q&A session in both English and Chinese. And they probably had lots of other organizing stuff I don’t know about.

***

At 8am, we loaded on our bus and headed for the Nebraska Furniture Mart (NFM). As mentioned previously, “mart” is a ridiculous name for this mega- furniture complex. It’s a really big facility.

My question for the students for NFM – and for all the companies throughout the day was: why did Berkshire buy this company? What was its competitive advantage at the time of the deal?

For NFM, the students honed in on the right factors pretty fast. First, it’s hard to ship furniture very far before the transportation cost significantly increases relative to the price. Plus, people still mostly like to see furniture in person and sit on it. So that makes it a local or regional business – and a Nebraska furniture store mostly doesn’t have to compete with furniture stores in places like California. NFM told us their radius for delivery is 250M around the store.

And within the local market, a larger company can have a couple of advantages due to its scale. One advantage is superior selection – as furniture takes up a lot of space and requires a big show room and inventory. It’s hard to smaller stores (by volume) to carry these big fixed costs. Plus, a much bigger store can also get a purchasing advantage.

And these factors are mostly what NFM competes on: lower prices and superior selection in their regional market. NFM aims to have the largest selection in their product categories and to have unbeatable prices. Which basically means most customers have no reason to go anywhere else to shop for furniture (well, except for certain brands and luxury products).

In fact, if you look on their store brochure, this is how they describe themselves:

  • “America’s largest volume home furnishings store”
  • “Best brands, legendary prices, unequaled selection”

The categories they cover are key to this strategy. They focus on furniture, flooring, appliances and electronics. And as the above strategy only works for large items you can’t ship and that you want to see in person, this is mostly about furniture. For furniture, they have the largest selection in the Midwest. They have hundreds of recliners and more than 40 sofa styles. Plus they have more than 100 bedroom sets.

For flooring, they have the largest flooring selection in the Midwest (carpet, rugs, tile, vinyl, wood, countertops). For appliances, again the largest selection in the Midwest. More than 400 appliances.

But I tend to think this business is mostly about furniture and flooring. Certainly consumer electronics is probably just offered for strategic reasons (so you have no need to go anywhere else). Note they have also recently added lawn care / lawn mowers and exercise equipment. Also big hard-to-ship items.

So the competitive advantage story is one of regional geographic dominance. You eliminate the far away competitors by the physical aspects of furniture. And within your geography, you get bigger than your rivals, which lets you beat them on price and selection. It’s about a production cost advantage and then economies of scale in the big fixed costs (especially real estate and inventory).

I think the above was a particularly powerful story in 1983 when Berkshire Hathaway bought the company. But has it changed? For example, how does e-commerce impact this?

Management mentioned they currently have 350,000 SKUs on their website. And Warren wants it to be 1M. So the whole idea of having superior selection is definitely being affected by online sales. However, they also said +90% of sales are still in the store, with many driven from the website. Overall, I don’t see this business being seriously disrupted at this time. It’s really hard to get around the delivery costs of sofas.

Here are some of the basic facts and folklore about Nebraska Furniture Mart:

  • NFHM was founded in 1937 by Rose Blumkin, a Russian immigrant who famously left Russia by bribing a guard at the Russian-China border with a bottle of vodka.
  • The company was launched in the basement of her husband’s pawnshop.
  • Some of her sayings include “cash is king” and “sell cheap and tell the truth”.
  • A vendor once sued her over her pricing and in court she showed that she was just selling 10% above cost. The judge dismissed the case and became a customer the next day.
  • In 1983, Warren Buffett bought the company with a one page document. The story goes he did this without asking for any financials. But I really don’t buy this. I think he had been watching the company for a long time and had figured out their financials.
  • After Mrs. B’s son and grandson took over, she famously opened a competing store across the street, called Mrs. B’s Clearance Center. Warren Buffett showed up with roses and chocolates to get her to come back. He also got her to sign a non-compete.
  • Mrs. B worked until age 104. Near the end of her life she famously rode around on a kart in the store and would argue with salespeople over the deals they were offering.
  • Today NFM has 3-4 stores. They opened in Kansas City in 2003 (after 67 years). And then in Texas in 2015. After the first new store, Warren said “that was fun. When do we do this again?”

That was it for the furniture mart visit. We then headed back to the Omaha Hilton for the big event. That’s in Part 2. Located here.

Thanks for reading, jeff

A special thanks to the incomparable Shujun Ma, Robert Bao and everyone at the Peking University International and External Relations Department for making this all happen. This was a team project. I just happen to be the one who blogs.

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