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.