This is Part 3 about our trip to Omaha with 20 Peking University students. In Part 1, I went through our morning visit to the Nebraska Furniture Mart. In Part 2, I detailed the Q&A and lunch with Warren Buffett. Needless to say, everyone was pretty jazzed after that. You might even use the word giddy. After that it was off to more Berkshire company visits.
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Our Visit to Borsheim’s Jewelry
We boarded our bus and headed West to the big Borsheim’s jewelry store. The management gave us a nice presentation and tour. I previously wrote about Borsheim’s (here) and won’t repeat most of that.
But first a confession. I don’t understand jewelry. Like at all.
I get that if you give a diamond to a woman on Valentine’s day, an anniversary or a birthday, they usually like that. But I don’t really get it. I still mostly see an expensive shiny rock. I have also come to understand that you should never refer to any such gift as a “shiny rock”.
Consumer behavior in jewelry is pretty much a mystery to me. But to be fair, I buy a lot of stuff that probably doesn’t make sense to other people. I like motorcycles. I like superhero movies. I like any sort of sport where I get to punch or kick something. But I would point out that my hobbies are in a far less expensive category of irraitonality.
With this in mind, I asked the students my standard questions: Why did Warren buy Borsheim’s jewelry in 1987? What was its competitive advantage? Does it still have it?
And the students narrowed down quickly to the important factors. How do customers buy jewelry? What do they care about?
Warren had just suggested this approach in his Q&A. That it helps to put yourself in the mindset of the customer. Walk through the process. It also helps to put yourself in the mind of a competitor. I do both for every company I look at.
In the Q&A, Buffett had also mentioned that when he bought Sees candy, he thought there was “untapped pricing power”. That it was a business with “pricing flexibility.” Chocolate is an occasional luxury and most of its customers don’t care if you charge $1.2 instead of $1 per piece. Plus Sees candy is also frequently given as gifts. It is something you give to a girlfriend or wife on Valentine’s day or Christmas. And most guys won’t give their wife discount chocolate on such occasions.
Jewelry, like chocolate, is a gifting business and this is a very important part of Borshem’s. Plus there is a lot of social pressure in jewelry. A lot of men buying jewelry for women is because they have to. It’s almost forced gifting. There are lots of other reasons people buy jewelry but it is a sector with some weird consumer behavior.
What is the consumer process for Borsheim’s?
A customer’s first interaction with Borsheim’s is often a man buying a wedding ring for his fiancé. In this case, your average guy will almost always ask for advice – from his fiancé, a friend or from a jeweler. They want someone they can trust and who will help them pick the right ring. And they will not usually skimp too much on price. This typically starts the relationship and the customer will then continue buying for anniversaries and birthdays after this. Per Warren Buffett, “if you don’t know jewelry, you need to know a jeweler.”
So like Sees candy, there is a lot of price flexibility in jewelry. And in this case, I think the consumer psychology is much more powerful. Borsheim’s talks about serving the “special moments in life”. About times when you “need a gift”. That sort of language is a tip-off to the strategy.
How do competitors view Borsheim’s?
Borsheim’s is a value player. They are offering quality jewelry, not cheap stuff. But they are also offering prices others can’t beat. The company is built to live on smaller margins than its competitors. Companies like Tiffany’s live on 60% gross margins. While Borsheim’s was built to thrive at 40%. Hence they have one big store in Omaha, instead of lots of smaller stores in prestigious (i.e., expensive) locations. Plus, they can typically buy jewelry at 15% cheaper due to their volume (and because they make their payments in cash).
The other part of their proposition is “big selection”. A typical independent jewelry will stock around 2,500 items. Borsheim’s typically has 100,000 items available to view. So as a retailer, they are somewhat similar to the furniture mart. They are the local destination with the biggest selection and the lowest prices. And just like people like to sit on sofas before they buy, they also have historically liked to “see, touch and feel” rings before they spend $3,000.
So if you are a competitor, how do you beat them? How do you get their customers to come to your store? Well, you would need to match their prices and selection. That is not easy to do. It’s a game of local scale and dominance.
Is their competitive advantage fading?
Borsheim’s “big selection” advantage is definitely decreasing. The internet is making that easier to match than before. Online competitors like Blue Nile offer 300,000 gem stones on their site (but most not are owned) and they have increasing access to diamonds.
Plus, people are getting more comfortable with the idea of buying jewelry online and having it shipped. In this case, the business is not locally limited by the value vs. cost of shipping the item (like furniture). The shipping is a small percentage of the cost for a wedding ring.
So this has historically been a local service business where you went down to the store you trust – and that had the biggest selection and best prices. But this may be fading. Management mentioned that the most common question they get is how much of their business is now online. And they spoke a lot about how they are trying to recreate the Borsheim’s experience online.
Borsheim’s management also said their three pillars are “value”, “selection” and “customer service”. I have described the first two pillars. But the third is probably Borsheim’s best strategy to protect their business going forward. “Customer service” speaks to the unique psychology of buying and gifting for jewelry. People worry about getting the wrong jewelry. They want advice. And Borsehim’s sales staff typically have 15-20 years of experience at their store. The customer relationship is critical and they get a lot of repeat business.
Some final factoids about Borsheim’s:
- It was founded in 1870 as Brown & Borsheim in Indianapolis. They moved to Council Bluffs in the 1880’s, where they did watches and clocks for the railroads.
- In 1947, the Friedman family bought Borsheim’s. The Friedmans and the Blumkins were in business together in the Nebraska Furniture Mart and the Friedmans wanted to exit furniture.
- 1960-70’s – Ike Friedman took over and it became a regional power.
- 1986 – They left downtown (5,000 square feet) and took their current facility (23,000 square feet).
- In 1987, Berkshire bought the company.
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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