It may come as a surprise to investors to hear that Berkshire Hathaway is the largest furniture retailer in the U.S., ahead of second-place Ikea.
Berkshire Hathaway is a holding company, and it owns about 70 subsidiary companies in addition to its equity positions in publicly traded stocks. It owns four furniture retailers: Nebraska Furniture Mart, R.C. Willey Home Furnishings, Star Furniture Company, and Jordan's Furniture. It also owns CORT, a business-to-business furniture rental service.
These companies share several features that Buffett finds compelling, and they're the opposite of the core operating qualities of digital furniture retailer Wayfair (W +2.39%). Wayfair has been posting dramatically declining sales and net losses, but its stock is up 111% in 2023.
I don't know if the turnaround investors are expecting is imminent or if investors are in dreamland, but whatever happens to Wayfair stock, the company could learn a trick or two from these Buffett-backed companies. Here are two reasons Wayfair wouldn't make it into the Berkshire Hathaway portfolio.
1. No competitive edge
Buffett detailed his acquisition of Nebraska Furniture Mart (NFM) in the 1983 shareholder letter. What stands out are really the same characteristics he mentions all the time when describing the kind of company he looks to buy, which are excellent management and a competitive edge.
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Key Data Points
At the time, NFM was the largest furniture retailer in the U.S. and was owned privately by founder Rose Blumkin. Buffett said he'd
...rather wrestle grizzlies than compete with Mrs. B and her progeny. They buy brilliantly, they operate at expense ratios competitors don't even dream about, and they then pass on to their customers much of the savings. It's the ideal business -- one built upon exceptional value to the customer that in turn translates into exceptional economics for its owners.
Wayfair owns several furniture brands that range from mid-price to expensive. It hasn't found a particular niche. Rather, most of its products, as nice as they may be, target a broad audience. Ikea, for example, targets price-conscious consumers (in addition to having many other exceptional qualities that differentiate its model). The fourth-largest U.S. furniture company, Williams-Sonoma, attracts an upscale customer throughout its brand assortment. In reaching every corner of the U.S., Wayfair might be overshooting, and it ends up competing with every other bland retailer, including companies like Amazon and Target.
It has actually pivoted to becoming a third-party marketplace like Amazon to boost sales, but that looks like the wrong direction. Why compete with the largest e-commerce company in the country? That takes out whatever defining qualities it may have and puts it directly in competition with a stronger company that has an unbeatable loyalty program.
2. Not focusing on profits
Buffett told a humorous anecdote about how Blumkin started out. She was an uneducated Russian immigrant with a dream and incredible business sense. She found ways to outdo all of her competition, who brought her to court several times with accusations of violating fair trade laws. "At the end of one case," Buffett said, "after demonstrating to the court that she could profitably sell carpet at a huge discount from the prevailing price, she sold the judge $1400 worth of carpet."
NFM focuses on low operating costs and passing that on to the customer. Not only is that its competitive edge, breeding loyalty and generating high sales, it makes it an unbeatable business that can outlast the competition.
Wayfair, on the other hand, has been racking up costs as it builds out its business. It became briefly profitable when sales soared at the beginning of the pandemic, but instead of harnessing that opportunity by strategically growing in the right places, it missed the boat by spending a lot more. It's scrambling now to cut costs, but so far, revenue decreases are outpacing cost-cutting measures.
W Total Expenses (Annual) data by YCharts
Is it all about price?
I don't want to finish here without referring to luxury furniture company RH, which Berkshire sold in the 2023 first quarter. It targets an upscale clientele and is therefore dissimilar from the other Berkshire-held furniture retailers. Buffett isn't necessarily looking for retailers that sell at cheap prices; what matters to him are the competitive edge and the ability to expand margins, and RH is usually a star here.
Why did Buffett sell RH? He didn't address that, and he rarely addresses changes in his equity positions. One can speculate that in this climate, while his other furniture companies compete on price (and he owns them fully, anyway, which is an entirely different story), RH is going to face a higher uphill battle to get back to growth and strong margins.
Wayfair is working diligently to do these same things, but for now, I would follow Buffett's lead and pass over Wayfair stock.
