Buffett cuts his Wal-Mart investment as consumers shift online and to Amazon
December 7, 2016 12:23 PM
(Bloomberg)—When Berkshire Hathaway Inc. vice chairman Charles Munger lamented the mistakes made in the company’s first 50 years under Warren Buffett, he cited the failure to buy Wal-Mart Stores Inc. stock early enough in the retailer’s history. Judging by recent events, Buffett doesn’t think Wal-Mart is such a great idea for his company’s next half-century.
Berkshire said last month that it cut its holding in the Bentonville, Ark.-based retailer to 13 million shares as of Sept. 30, marking the third-straight quarter that Buffett’s company lowered its stake. Online shopping has shifted the balance of power among retailers, a trend that’s become more evident this holiday season, and Wal-Mart stock, No. 4 in the Internet Retailer 2016 Top 500 Guide, has trailed Amazon.com Inc. (No. 1) in recent years.
“He makes mistakes too,” Brian Yarbrough, an analyst with Edward Jones & Co., said of Buffett. “There are a lot of better places to put new money than Wal-Mart,” he added. “They are going to have to continue to fight this headwind of Amazon.”
Buffett, 86, has long highlighted the vulnerability of even the largest retailers, citing Sears, F.W. Woolworth, Kresge and Montgomery Ward as merchants that lost their dominant positions. More recently, he’s focused on the threat from companies like Jeff Bezos’s Amazon that sell everything from food to clothes and electronic gadgets online.
“It is a big, big force and it has already disrupted plenty of people and it will disrupt more,” Buffett told shareholders at Omaha, Neb.-based Berkshire’s most recent annual meeting. Many competitors, “including us in a few areas, have not figured the way to either participate in it, or to counter it.”
Wal-Mart still trades below its closing price from 2013, even after rallying 15% since Dec. 31. Berkshire’s stake topped 60 million shares in 2014, when Wal-Mart was one of Buffett’s five biggest equity positions, valued at more than $5 billion at the end of the year. The holding was cut by more than half in the three months ended Sept. 30, according to a regulatory filing, and now it doesn’t crack the top-15 list in Berkshire’s portfolio, according to data compiled by Bloomberg.
While Buffett is known for sticking with stocks like Coca-Cola Co. for decades, he’s not wedded to old favorites when circumstances change. In recent years, he got rid of most of Berkshire’s stock in Procter & Gamble Co. and Graham Holdings Co., the former owner of the Washington Post.
His company recently invested in airlines, an industry that Buffett long dismissed as too risky. Also, he’s empowered deputy stock pickers to diversify the portfolio, a move that led to an investment in iPhone maker Apple Inc. (No. 2) Buffett has mostly avoided tech stocks, and missed out on the years-long rally at Amazon, even as he repeatedly praised Bezos.
Berkshire’s units include several retailers, such as Helzberg Diamonds, No. 750 in the Internet Retailer 2016 Top 1000; Jordan’s Furniture and Nebraska Furniture Mart (No. 336). They are a fraction of the size, however, of subsidiaries like the BNSF railway, the Geico auto insurer and an energy operation. And Buffett has said he learned some tough lessons in the retail business.
“We have a really bad record, starting in 1966,” Buffett told CNBC in 2014. “We bought what we thought was a second-rate department store in Baltimore at a third-rate price, but we found out very quickly that we bought a fourth-rate department store.”
Still, he saw something different in Wal-Mart, which, like Geico, established itself as a dominant low-cost provider. Berkshire disclosed a stake of 19.9 million shares in 2005 and doubled the holding by the end of 2009. The stock had already surged more than 4,000% in the two decades through 2004. Munger, 92, has lamented that Berkshire didn’t invest sooner.
“While mistakes of commission were common, almost all huge errors were in not making a purchase, including not purchasing Wal-Mart stock when that was sure to work out enormously well,” Munger wrote in a 2015 letter to investors. “The errors of omission were of much importance. Berkshire’s net worth would now be at least $50 billion higher if it had seized several opportunities it was not quite smart enough to recognize as virtually sure things.”
Wal-Mart’s efforts in e-commerce haven’t inspired the same confidence. More than half of U.S. online consumers say they go to Amazon first when searching for a product. The nation’s shoppers spend 30% of their time online at Amazon.com, compared with 3% on Walmart.com.
Wal-Mart in September acquired online marketplace Jet.com, giving a boost to e-commerce sales. The company is also encouraging customers to order over the internet and pick up items at stores, and is even bringing grocery orders to online shoppers’ cars in parking lots. Buffett didn’t immediately return a message left with an assistant seeking comment. Wal-Mart had no immediate comment.
Buffett has a long history with the retailer, buying its McLane food-distribution business in 2003. The billionaire wrote the next year that he often voted for Wal-Mart in Fortune magazine’s “most-admired” survey, and acquired the trucking unit after a two-hour negotiation and without any due diligence.
“We knew everything would be exactly as Wal-Mart said it would be,” Buffett wrote. “And it was.” Sales from Berkshire’s units to Wal-Mart were about $13 billion for three straight years, according to the billionaire’s most recent annual report.
Buffett says that he and Munger look for growth in industries like energy production and some manufacturing operations, where there are substantial barriers to entry for potential competitors. This year, they acquired Precision Castparts, which provides specialized products to the world’s largest aerospace companies.
“Charlie and I are not going to out-Bezos Bezos by a long shot,” Buffett said at the annual meeting. The retail consumer’s shift to online ordering “does not worry us, obviously, with Precision Castparts. It doesn’t worry us in terms of the overwhelming majority of our businesses. But it is a huge economic trend that 20 years ago was not on anybody’s radar screen. And lately it’s been on everybody’s radar screen.”