Berkshire Hathaway
Ethan Allen - Buffett Company?

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By R1200CA
September 10, 2001

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First, let me clear up a few things regarding the furniture industry. The North Carolina connection for discount furniture pricing has nothing to do with these outlets being "wholesalers". The North Carolina companies selling discounted furniture are simply aggressive, lower-margin retailers. Retailers in the High Point, North Carolina and Hickory North Carolina area are taking advantage of the fact that the major wholesale market for the U.S. furniture industry takes place twice a year in High Point, North Carolina. The center of the industry from a manufacturing standpoint is still, to some lesser degree than in the past, centered in North Carolina. Ethan-Allen's primary upholstery and case goods (wood furniture) plants are in North Carolina, but Ethan-Allen still has regional plants in other parts of the U.S. Aggressive retailers have "piggybacked" on this national reputation to draw retail customers to their stores. They buy their goods from the same manufacturers as Star, RC Willey, and Nebraska Furniture Mart...and they price these goods aggressively.

Being in the furniture industry, and having been a BRK shareholder for a few years, I seriously doubt that WEB would take a strong position in the furniture industry outside of the retail segment. Why? Because there are approximately 2,500 manufacturers of furniture in the U.S., even though many of these companies are now going to China for lower-cost products. No one company, or even a handful of companies controls a large enough share of the market to have much pricing power over the aggregate of all other manufacturing companies.

If the furniture industry mirrored more the automotive industry, then I would think WEB might give serious consideration to purchasing companies like Ethan Allen who have some brand name recognition. But unlike the automotive industry, where there are only a handful of manufacturers, the furniture industry has tremendous excess capacity with 2,500 manufacturers and only a handful of large, powerful retailers. The retail segment controls the furniture industry, and the manufacturing segment controls the automotive industry (few manufacturers controlling all of the retail outlets). Why are there so many furniture manufacturers? Few barriers to entry and low capital requirements, making it a perfect business for small entrepreneurial concerns. Manufacturers have relatively thin margins, and few have any ability to build moats around their businesses. Ethan-Allen is a pioneer in the concept of having control over its retail destiny, but folks, trust me, there isn't one thing that Ethan-Allen can do that cannot be fairly easily duplicated by others in the business. La-Z-Boy now has its own stores, and other larger manufacturers such as Bassett are doing the same. But the independent retailer such as our Nebraska Furniture Mart can buy products comparable to these vertically integrated brand name stores from a vast, vast array of other furniture manufacturers.

Our industry is suffering. 60% of the case goods (wood furniture) made for the retail furniture consumer used to be manufactured within a 200 mile radius of High Point, North Carolina. Sadly, that number has dwindled significantly since the California Gold Rush mentality has sent U.S. manufacturers to China to outsource many of the products once made here. Ethan-Allen, La-Z-Boy (Lea, American Drew, Sam Moore and others), Lifestyle (Drexel-Heritage, Henredon, Lexington and others), Furniture Brands International (Lane, Broyhill, Thomasville and others) are all feeling the effects of our economic slowdown. And because a few of the U.S. furniture manufacturers have ventured overseas for cheaper labor, all the others are doing the same thing. The result is that our industry is losing jobs to China at an alarming rate. Traditional mainstays in the U.S. furniture industry such as the Lane cedar chest are no longer built in Altavista, VA., but in some government owned and operated plant on mainland China. We are destroying our own capital in pursuit of cheaper labor, while at the same time cannibalizing our own market. With increasing job loss, what difference will it make how inexpensive the Asian-made goods will become? If you don't have a job, you won't give much consideration to replacing that old sofa.

Sorry for the digression about the state of the furniture industry. The fundamental structure of the industry is such that the best opportunities that WEB currently has for making money from furniture is in retailing (where margins are higher), not manufacturing (where margins are lower). And though Ethan-Allen does both, so do others. Moats are tough to build when a strategy is easily duplicated by others.


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