Lessons in Competitive Advantage from My Visit to Warren Buffett’s Nebraska Furniture Mart (Tech Strategy)

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In Part 1, I went through Borsheims, Buffett’s jewelry retailer in Omaha. It has historically had a very strong business model, although this may be changing. And his jewelry business has a lot of interesting parallels to his biggest retail business, Nebraska Furniture Mart.

Company 2: Nebraska Furniture Mart (NFM)

I was in Omaha with 20 students from Peking University. We had rented a bus to go around town and at 8am we boarded and headed across the river into Western Omaha. We were going to the Nebraska Furniture Mart, arguably the world’s most (and only?) famous furniture store. The history of this furniture store and its founder Rose Blumkin are part of Berkshire lore and well-known. Here are some of the basic facts:

  • Rose Blumkin was born in 1908 in Russia (now Belarus) and immigrated to the United States in 1917. She famously left Russia by bribing a guard at the Russian-China border with a bottle of vodka.
  • After Russia, she traveled across China before finally arriving in the Northwestern USA. She originally settled a couple of hours from Omaha before later moving into town to start her furniture business.
  • The first store was founded in 1937 in downtown Omaha. It focused on furniture. Known as “Mrs. B.”, she was in her mid-40s when she opened the business in the basement of her husband’s pawnshop with an investment of $500 ($9,171.30 adjusted for inflation in 2022).
  • In 1950, the company had cash flow problems. They had accumulated debt and Mrs. B held a big sale in the Omaha auditorium. The sales from this day paid off the debt and they have used little debt since.
  • The company’s motto is “sell cheap and tell the truth”. They profit by their larger scale and by being hyper efficient. They live happily on small margins.
  • In 1970, they moved West to their current location. They closed the downtown store in 1980.
  • 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.
  • In 1994, they added electronics and appliances. Today, NFM offer four categories – furniture, flooring, appliances, and electronics.
  • In 2017, the Omaha store got 10,000-20,000 customers per day. They had 400-600 salespeople plus phone sales.
  • The showrooms and inventory are all located in one massive facility in Western Omaha. The headquarters is located above the retail space.

On the way to the store, I asked the students my standard question: why did Warren Buffett buy this company? Or more specifically, what was its competitive advantage?

We arrived at the 80-acre facility and my first thought was that the name “Furniture Mart” might be sarcastic. How is this a mart? It was a massive 6-7 warehouse and retail facility. It is the country’s largest furniture store, which is somehow in a city of only 400,000 people.

At the “Nebraska Furniture Mega-Complex” (better) we disembarked and met a couple of the other schools taking part in the day (University of Houston, UC Berkeley, Chicago Booth and others).

The Head of Marketing Mark Hamilton (shown below) gave us a nice welcome and introduction. He recounted the history of the store, and it soon became pretty clear that the Peking students were going to stand out a bit. Members of our group immediately started asking question after question. Really good questions too. They also began taking lots of notes and photos. Over the next +90 minutes, we got a fascinating tour of the furniture store.

Below are my notes.

  • They offer a massive inventory in their four categories – furniture, flooring, appliances, and electronics. They also offer in-house brands. The Warren mattress is popular.
  • 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, they are again the largest selection in the Midwest. More than 400 appliances.
  • Management describes their buyers are surrogates for their customers and it is their job to find them the best deals and styles. The deals with suppliers can change year by year.
  • They had recently opened a Texas store. One of my students asked about the factors used to choose this location. Management kind of dodged the question but they did mention they feel they know customers in the middle of the USA very well. They said their focus is on building local efficiency and assembling good personnel in a geography. He said they view their market as a 200-mile radius around the store. That is important.
  • There was some interesting discussion about their online store, in which they seek to “recreate the experience” of their physical stores. They raises the question of whether customers (especially younger ones) are becoming more comfortable with purchasing furniture purely online. Note: in China people buy big appliances like dishwashers and refrigerators online. Actually, they buy them on their smartphones.
  • Another question for the online store is whether it changes their pricing advantage. Management said they have bots that search competitor prices online and then update their own prices every day – by automatically updating the LED prices tags on items in the store. The price tag is connected and controlled by the computer through beacons installed in the store every 15 meters.
  • They are moving towards designers and social networking. They want to seize opportunities and create trends through social networking, especially among younger customers.

Ok. Based on that, let’s jump to the key questions of:

  • Why did Warren buy NFM jewelry in 1983?
  • What was its competitive advantage? And does Borsheims still have it?

Question 1: What is the NFM Customer Experience?

I have three standard questions for most businesses.

  1. What is the customer experience?
  2. What is the competitive advantage?
  3. Are these changing with customer behavior, technology and/or regulation?

The customer experience for NFM is much simpler than for Borsheims. There is not a lot of gifting behavior in furniture and flooring. There is not a lot of complicated psychology. There are really three factors that matter for furniture.

  • Customers want to see a big selection
  • They want to see the selection in person. They want to sit on the sofas.
  • They are not looking for the cheapest option. This is purchasing for your home, which is emotional and aspirational. And buying the home was already a large expenditure, so there is some price anchoring.

Management says they anchor as the “destination retail community”. They target 80% of local customers, ignoring the very top and the very bottom of the market.

NFMs value proposition is very similar to Borsheims. They offer the biggest selection. And they offer the lowest prices for quality merchandise. Management repeatedly mentioned low price and big selection as their key customer offering. The customer knows they can see all the options in one location. The customer also knows they don’t have to negotiate price or search around for a better deal. This low price + big selection offering eliminates the need to go to any other store.

So, like with Borsheims, there is no reason to go to another store. But unlike with Borsheims, trust and personal relationships are not that important.

Let’s move on to the next question:

Question 2: Can Competitors Compete With NFM?

NFM is a value player. Their combination of the biggest selection and unbeatable prices has arguably been the biggest factor in their success. However, this does not work in appliances and electronics. Their core advantages are furniture and flooring. Management pointed to customers’ desires to sit and try out the furniture as still critical – although people buying online could be changing this.

But think about what it takes to offer the biggest selection and lowest prices in furniture in Omaha?

It’s a game of economies of scale in a low-growth and circumscribed market. In terms of my frameworks, it’s pretty straight forward.

  • The barrier to entry is the big fixed costs for opening a massive retail store in a relatively small geographic market. And then filling it will a big selection of very bulky inventory. Think of how much retail space it takes to show 50 different sofas? And all the inventory for them? It’s a big first step to match Borsheims current operations. Note: management mentioned the Kansas City store has 450 sqft of space plus 600 sqft of warehouse.
  • The competitive advantages are:
    • Economies of scale with fixed capital and operating costs in inventory and the physical store. They can spread out their inventory and retail costs over greater volume of sales. It will be hard to match their selection at the same per unit price.
    • Purchasing economies of scale. They get furniture cheaper. So they are hard to match on price. And they are impossible to beat.
    • Geographic and transportation costs effectively eliminate all their competition from more than 200 miles away. You can’t sit on sofas located in California. And shipping is also expensive.

This business is not about trust and relationships like Borsheims. It is all about the bulky physical nature of furniture and the fact that people like to see it in person before they buy. That makes it a local geographic market.

Having economies of scale within a circumscribed market is the critical scenario. In this case, the market is geographically limited (i.e., 200 miles) by both the preferences for seeing furniture in person and the transportation costs.

Some other factoids about NFM:

  • Management emphasized their salespeople are highly trained and are critical to their success. If they serve 10,000-20,000 customers per day and there are 400-600 of them, then that’s 16-50 customers per salesperson per day.
  • One of our students asked about margins and they said electronics and appliances are low margin, commodity products (not surprising). The engine of the business is clearly still furniture – and likely flooring. The other products like appliances are likely there for strategic reasons and so that they can be a one-stop shop for “home furnishing solutions”. It is also worth noting the differences in depreciation of inventory type. Carpets don’t go out of style and inventory doesn’t depreciate like apparel and electronics.
  • Management mentioned that they own their own distribution, except for the final leg of delivery into the customer’s home – which they contract. But this difference is not seen by the customer. They mentioned delivery is a key part of the customer experience and that breakage is a significant expense. So, they keep this mostly in-house.
  • One comment management made was very interesting. They said the pace of change is much faster now, but the big decisions like for construction of stores still take a long time to execute. That difference in timing is an interesting dynamic to think about.

For NFM, the students homed in on the right two factors pretty fast.

  • First, it’s hard to ship furniture very far before the transportation cost significantly increases relative to the price. People still mostly like to see furniture in person and sit on it. So that makes it a local or regional business.
  • 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.

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”

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?

Question 3: How are Customers, Technology and Regulations Changing This?

Management mentioned they had 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 happening in the store, with many driven from the website.

Overall, technology hasn’t been disrupting the furniture and flooring business yet. It’s really hard to get around the delivery costs of sofas. And people still like to sit on them first. However, this could change. We do see the major ecommerce companies of China targeting furniture for online-merge-offline.

As for regulations and customer behavior, these are both stable.

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Finally, here are some fun facts about Nebraska Furniture Mart and Rose Blumkin:

  • Some of Rose Blumkin’s sayings include “cash is king” and “sell cheap and tell the truth”.
  • A vendor once sued her over her low pricing and in court she showed that she was selling at only 10% above cost. The judge dismissed the case and became a customer the next day.
  • 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.
  • 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’s it for Part 2. Next up is Oriental Trading Company.

Cheers, Jeff

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Related articles:

From the Concept Library, concepts for this article are:

  • Economies of Scale
  • Location or Cost Advantage
  • Retail

From the Company Library, companies for this article are:

  • Berkshire Hathaway
  • Nebraska Furniture Mart

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

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This content (articles, podcasts, website info) is not investment, legal or tax advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. This is not investment advice. Investing is risky. Do your own research.

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