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Lunch With Warren

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A Singaporean businessman was the winner of this year’s online auction to have lunch with Warren Buffett, with a bid of $2.16 million. Andy Chua said he was happy to pay the money to the Glide Foundation, as a way to thank Buffett for all the advice he’d provided him though his books and public comments on investing and running businesses. The two have never met.

Chua owns a chain of beauty and grooming centers across Asia, but for the sake of some water-cooler speculation, let’s suppose he was a jeweler. What kind of advice would Buffett be likely to proffer as they chewed the fat at New York City’s Smith & Wollensky steakhouse?

The answer can probably be found in a letter Buffett wrote to Berkshire Hathaway shareholders after acquiring Borsheims in 1989.

The world’s richest man, who built his wealth on an uncanny ability to spot unappreciated value, sees the jewelry retail industry as one with:

  1. High overheads (due to low inventory turn).
  2. Average margins (at only 10 percent despite the huge inventory investment).
  3. High fixed costs (often around 40 percent of sales).

Whereas most investors see these as unattractive constraints, Buffett sees opportunity, thanks in part to the capital he has at his disposal.

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“At Borsheims the equation is far different,” Buffett wrote in his letter. “Because of our single location and the huge volume we generate, our operating expense ratio is usually around 20 percent of sales. As a percentage of sales, our rent costs alone are fully five points below those of our typical competitor. Therefore, we can, and do, price our goods far below the prices charged by other jewelers. In fact, if they priced to match us, they would operate at very substantial losses. Moreover, in a virtuous circle, our low prices generate ever-increasing sales, further driving down our expense ratio, which allows us to reduce prices still more.

“How much difference does our cost advantage make? It varies by competitor but, by my calculation, what costs you $1,000 at Borsheims will, on average, cost you about $1,350 elsewhere. This is called the ‘Borsheims Price.’ There are very few instances where we are unable to offer you those great savings due to restrictions, but you will always know upfront if an item is non-discountable.”

To be sure, that document was written 25 years ago but Buffett’s continued investments in almost every part of the manufacturing and retail ends of the jewelry business suggest he still sees solid potential to make money, even as margins shrink.

His recent expansion of Borsheims to add an outlet store also underscores his faith in that particular business’s competitive edge – its pricing power.

Even so, Borsheims’ management seemed surprised at just how price conscious outlet shoppers are. In a recent note to INSTORE, they recounted:

“We had the right merchandise, the right design and the right team of sales associates ready to pitch it. We even had the right pricing, but found that outlet shoppers really want to see the value displayed in a big and bold way.”

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Management’s first response was to increase the size of their originally small merchandise tags.

The second was to really reinforce the savings during the sales process.

“We found that outlet shoppers like to feel like they are getting a bargain, and want to know they are getting “50% off!” Instead of marking the lowest price right on the tag, we needed to also mark how good of a bargain it was.

“It was very important to these budget-minded shoppers to be able to tell their friends they got their ring or earrings at “60% less than retail!”

And what’s the key takeaway from the Borsheims’ experience for you?

Unless you’ve got Warren’s financial strength, forget trying to compete on price. It’s a race to the bottom.

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Finally, appreciate what’s made Buffett rich — a focus on value. Differentiate with the value you bring to the market.


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