Confused by the retail business?
You’re in good company. Warren Buffett is at a loss too — an unusual state for the superstar investor who turned a New Bedford, Mass., textile company into a portfolio of firms worth more than $420 billion under the Berkshire Hathaway umbrella.
“Retailing is tough for me to figure out,” admitted the 86-year-old investing guru. “If you go back to when I was a kid, in every town, the guy that owned the big department store in town was king, whether it was Marshall Field or Dayton, or Hudson in Detroit. The department store was king. People said, ‘What can happen to it? It’s down there where the street car lines crossed.’ And women took the street car to shop there and they could see 500 spools of thread and 500 wedding dresses and they couldn’t see anything like that. It offered this incredible array of goods.
“And then somebody came along with the shopping center, instead of making it vertical with all this display owned by one person, they spread it out, owned by many,” he said. “And now comes the Internet and that’s the ultimate variety of things that you can get to very easily. So, people love variety, they love low prices. It just keeps evolving and the great department stores, many of them have disappeared and the rest are under pressure.”
The latest to show the strain is J.C. Penney Co. Inc., which said Friday it would shutter 130 to 140 of its doors this year in a bid to make its base more productive. Macy’s Inc. is also closing stores and is said to be attracting the interest of Hudson’s Bay Co.’s Richard Baker, the latest in a long line of ambitious department store consolidators.
Buffett weighed in on the state of retail during a CNBC interview on Monday, during which he also praised Amazon founder Jeff Bezos as perhaps the best manager he’d ever seen.
“It’s remarkable, here a guy gets in a car with his wife to travel, leaves [hedge fund D.E.] Shaw and starts traveling and thinks, ‘How am I going to take over the world, maybe I’ll sell books online.’ He is one terrific businessperson.”
Still, Berkshire never invested in Amazon.
“Obviously, I should have bought it long ago, but I didn’t buy it long ago because I didn’t understand the power of the model,” Buffett said. “As I went along, the price always seemed to more than reflect the power of the model at that time. I missed it big time.”
He isn’t alone in that. As Amazon made its name as an online bookstore with aspirations in other product categories, fashion largely watched, with many believing apparel was too tactile a purchase, too reliant on having the right fit to see much of the business go online. The majority of apparel sales are still made in stores, but fashion has clearly changed its tune.
Fitch Ratings projected that retail sales would grow 3 to 4 percent this year, excluding automobiles and gasoline, but that more than half of that expansion would come from the web while brick-and-mortar sales are held to growth of about 1 percent.
Amazon is not all of that growth, since many traditional stores are also seeing strong gains online, but it is a big part of it and is also setting the pace for what e-commerce means, with free two-day shipping with its Prime membership, customer reviews, shipping updates and so on. Amazon’s product sales rose 19.4 percent to $94.7 billion last year.
As Buffett has nurtured his Bezos bro-mance, he has moved away from at least one old-line retailer, even as it seeks to be become more digital.
Over the past year, Berkshire Hathaway sold off 54.8 million shares of Wal-Mart Stores Inc., cutting the value of its stake in the retail giant to $96.3 million from $3.4 billion. (And the investment firm’s Fruit of the Loom innerwear business relies heavily on Wal-Mart, which made up 41 percent of the company’s sales last year, according to Berkshire’s annual report.)
Wal-Mart acquired Jet.com in a $3.3 billion deal last year, bringing on board Amazon ex-pat Marc Lore to rev up its digital operations to better take on the digital leader.
That tees up what could very well be one of the sharpest battle of the giants and business models that retail has seen in years — and Wal-Mart knows the power that a new model can have, having weathered years of criticism that it wrecked Main Street retailers and strip centers as it brought in its low-price approach.
Buffett made his billions as a value investor, pouring money into companies that were trading below their actual worth. When he says he’s having trouble figuring out retail, he means he’s having trouble figuring out how to invest in the sector and make money doing it. And given the performance of most retail shares lately, it appears the Sage of Omaha remains as wise as ever.