This 104 Year-Old Woman Taught Billionaire Warren Buffett a Lesson He'll Never Forget

Through Berkshire Hathaway, Warren Buffett has nearly $5 billion worth of Wal-Mart and Costco, but a business he bought from a woman more than 30 years ago reveals why he has such massive positions.

Jun 8, 2014 at 1:32PM

One piece of wisdom she imparted to the generations following her was, "If you have the lowest price, customers will find you at the bottom of a river."

It turns out one of the best pieces of wisdom Warren Buffett received didn't come from Wall Street, but a woman who sold the business she started with $500 to Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) for $60 million. 

Buffett And Blumkin

Buffett and Blumkin. Nebraska Furniture Mart. 

The little business that could
Much has been made of the various businesses Buffett has acquired to build his empire, and one that has been instrumental is Nebraska Furniture Mart. Founded by Rose Blumkin -- affectionately known as Mrs. B, and the woman Buffett cited in the quote you see above -- in 1937, it has become one of the most successful furniture retailers in the country.

When Buffett bought the store in 1983, he remarked:

Today Nebraska Furniture Mart generates over $100 million of sales annually out of one 200,000 square-foot store. No other home furnishings store in the country comes close to that volume. That single store also sells more furniture, carpets, and appliances than do all Omaha competitors combined. 

In 1984, sales spiked another 15% and in its first full year it contributed $14.5 million to the $90 million of operating earnings at Berkshire Hathaway.  And that growth hasn't stopped, as its stores in Omaha and Kansas City netted about $450 million each in sales last year.

And with the store in Dallas being built now, Buffett said he predicts "the Texas store will blow these records away."

So how has NFM been so successful? It turns out the answer reveals why Berkshire Hathaway has major positions in both Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST).

The bottom of the river
With the opening of the Kansas City Nebraska Furniture Mart in 2003, Buffett penned the above quote. It's evidence he believes providing cost advantage to customers can be one of the strongest competitive advantages.

Buffett

In his 2007 letter to Berkshire Hathaway shareholders, Buffett said businesses need a "moat," to protect them, and "formidable barrier such as a company's being the low-cost producer (GEICO, Costco) or possessing a powerful worldwide brand (Coca-ColaGilletteAmerican Express) is essential for sustained success."

After all, it's this low cost lead that has allowed GEICO to watch its policies grow from just 2.5% of the U.S. insurance market when Berkshire fully acquired it in 1995 to more than 10% in 2014. In total, it's increased its policies by nearly $16 billion, from $2.8 billion to $18.6 billion. And one of the biggest reasons behind this growth is its ability to offer the lowest price to customers.

Buffett said this year while "no one likes to buy auto insurance," it's a necessity, and as a result, "savings matter to [families] – and only a low-cost operation can deliver these." In his words:

GEICO's cost advantage is the factor that has enabled the company to gobble up market share year after year. Its low costs create a moat – an enduring one – that competitors are unable to cross.

Remember it was just a few weeks ago when we learned Buffett grew its holdings of Wal-Mart by 17% through the first three months of the year. And what does Wal-Mart offer its customers? Products they need at low costs.

Or in its words, the opportunity to: "Save money. Live Better."

While the Costco holding of Berkshire Hathaway is much smaller than its Wal-Mart position -- $500 million versus nearly $4.5 billion -- it too is best known for the savings it offers customers.

The key takeaway
Buffett concluded his discussion on the Manufacturing, Service and Retailing Operations of Berkshire Hathaway this year by telling us:

Aspiring business managers should look hard at the plain, but rare, attributes that produced Mrs. B's incredible success. Students from 40 universities visit me every year, and I have them start the day with a visit to NFM. If they absorb Mrs. B's lessons, they need none from me.

Whether running a business, or looking for one to invest in, we too must recognize how powerful low prices can be.

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Patrick Morris owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway and Costco Wholesale. The Motley Fool owns shares of Berkshire Hathaway and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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