Berkshire Hathaway Goes Nuts For Oriental Trading

Berkshire Hathaway (BRK-A) normally acquires financially healthy companies that possess a durable economic advantage. The company has thrown that approach completely out the window by agreeing to acquire Oriental Trading Co. for half a billion bucks. This transaction does not resonate at all with Berkshire’s business model.

Oriental Trading emerged from Chapter 11 bankruptcy only last year. Warren Buffett’s famous aversion to money-losing enterprises should have kept him from even considering this company. Oriental’s business model is low-cost, commodified, and easily duplicated by any number of competitors. There’s no economic moat anywhere in sight. A company that offers guaranteed lowest prices on 40,000 products had better have the kind of stranglehold on its suppliers that Wal-Mart uses to keep that kind of promise.

KKR no doubt relishes losing its original bid for Oriental and watching the Carlyle Group eat a big loss. I wonder why Berkshire is handing KKR such a great payoff for taking a catalog retailer through Chapter 11. Retail will be the first sector destroyed when the next leg of the prolonged U.S. downturn materializes. Oriental Trading has to compete with every odd-lot trinket seller on eBay. Berkshire is straying from the business model that has made it one of the best holding companies in American history.

Full disclosure: No position in BRK-A, BRK-B, or Oriental Trading Co. at this time.

About Anthony Alfidi 128 Articles

Affiliation: Alfidi Capital LLC

Anthony Alfidi is the Founder and CEO of Alfidi Capital. His firm publishes free investment research with honesty and humor.

Mr. Alfidi holds a Bachelor's degree in human resource management from the University of Notre Dame (cum laude) and an MBA in finance from the University of San Francisco. He is a life member of Beta Gamma Sigma, the academic honor society for business majors. He has been a private investor since the 1990s.

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