Behind the BRK-A: Butterface Halfway
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Berkshire Hathaway is Wal-Mart in Buffett’s clothing
While Wal-Mart (NYSE: WMT) is a heavily scrutinized public company, Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) shields its numerous subsidiaries from similar public scrutiny through a combination of brilliant PR and minimalist chic – which extends to its reporting (and is a reflection of Warren Buffett’s genius with finance and his aversion to operations). Like a bad date, the future of Berkshire Hathaway is looking good but-for-her-face, and sadly there is little to indicate it will survive its creator.
Taking a look behind the BRK-A – not that burkha.
Although Wal-Mart is regularly pilloried for externalizing its employee costs to society, gaming the political system, and weak executive leadership, Berkshire Hathaway gets a pass for similar escapades (and is still heralded as a beacon during the recession even with returns half that of Wal-Mart over the last five years – like it or not, Wal-Mart is doing more to throw a lifeline to the 99%ers than any of the Buffettologists). Still, the Wizard of Omaha has worked his dark arts on a willing media and an eager public. Over the decades even Buffett’s odd marital arrangements and familial estrangements barely registered with a press starved for Oprah’atic dramas. Moreover, few investors thought that Buffett’s inability to settle on a single mate would replay itself at the corporate level and haunt future decisions more immediate to their long-term financial arrangements. (Still, it must be conceded that the relatively monotonous Walmartians do take high honors in the personal scandal category with the drunken “I’m Alice Walton, b*tch!” incident of ’98.)
Maybe Warren Buffett is just a prettier face than Alice Walton.
The genius of Warren Buffett is more than metrics and management, it has been his ability to say not only the things investors want to hear, but saying the things that people want to believe in. He’s also admitted that luck and emotional restraint have been key. However, the problem is that Wiz'O-bites like, “I wish I would have started investing earlier than I did [at age 11],” and DeBeersian koans like, “…our favorite holding period is forever” are situational fables. Not only is the average life span of a public company less than that of a house cat, even the respectable four to five decades of a big S&P powerhouse usually ends not in a merger, but in extinction. More honest but just as folksy might be, “Buy low and sell high,” which (thanks to a desperate need for the Buffett Effect) he did with Bank of America (NYSE: BAC) in 2007 and 2010 – though now it appears he's had to repeat his dance steps with the bank's new lawyer CEO who has even less of a track record than his predecessor. In light of Buffett’s Bank of America and other activities during this recession, “FIFO” might be a better epitaph than his stated preference for, “He lived to be really, really, really old.” However, should that happen, the cracks in Buffett’s foundation might become more noticeable. Take Berkshire’s subsidiary See’s Candies for instance.
As caskets are to Costco (NASDAQ: COST), candies are to Berkshire. Though not their biggest sellers, they are profitable products that both companies’ CEOs like to trot out as stories that amuse the lookyloos and give great copy. However, in See’s case, not only has Buffett appropriated the family business/independent chocolatier facade to lend a romanticized air to the product, but he has jacked up margins and accumulated profits by cutting employee benefits and playing games that re-classify decades-long full-time workers into part-timers – even before the recession. While far from creating a public relations “blood nougat” catastrophe, See’s has gotten a pass while other corporations that do similar are (licorice) whipped publicly for similar practices. It is not hard to imagine how a less lovable chunky white guy chomping down on peanut brittle will be portrayed by the chatterati. This does not bode well for a subsidiary that peddles status rather than value.
However, the real challenge to See’s is a more competitive market in the premium sweets category (especially among its fellow West Coast chocolatiers), and an increasing emphasis on health and sourcing concerns related to affluent indulgence. See’s has nice boxes, but has done little to penetrate the exotics and other trends in Wonkaland (best exemplified by Seattle-based artisanal chocolate-maker Theo Chocolate (which has major chocolate multinational executives backing and boarding its compelling bean-to-bar narrative). More disconcerting to investors having grown up in See’s country should be the tangible decline in the See’s product quality itself which has been diluted like a private equity firm dilutes a restaurant chain’s quality before “returning it to profitability” and unloading its desiccated carcass on the public to limp along into oblivion.
Moreover, the Santa Barbara Chocolate Company and other gourmet chocolate makers are taking advantage of new techniques and logistical services with products less encumbered by transportation costs (the bane of specialty micro-breweries), and will be able to aggressively challenge See’s in distribution, reputation, and feel-goodery factors in the post-Buffett age. Even See’s lucrative alliance with Costco could be displaced by the Brotman family’s own foray into premium chocolatiering – as Costco already does with chocolate candy (regular chocolate) and fine wines. Although, as the cocoa’rati are quick to point out, while See’s wants to be perceived as gourmet and artisanal, by all objective measures it is really just basic candy with good marketing and distribution. This in essence is the core dilemma facing Berkshire sans Buffett.
Nick Slepko has no position in any company mentioned here at the time of publication. The Motley Fool owns shares of Bank of America, Berkshire Hathaway, and Costco Wholesale. Motley Fool newsletter services recommend 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. If you have questions about this post or the Fool’s blog network, click here for information.