(BRK.A), (BRK.B)
Founded by the Moore brothers in 1883, Benjamin Moore Company has been a leader in indoor and outdoor paint for over a century. The company introduced the popular Regal® Wall Satin interior latex paint in 1957, and in 1982 became the first company to do computerized color matching. The company positions itself as a premium paint manufacturer, and its products consistently rate well. In 2014, it was ranked highest in interior paint customer satisfaction by J.D. Power for the fourth year in a row.
In 2000, Berkshire Hathaway acquired the company for roughly $1 billion in an all cash deal. It’s a deal that has worked out well for Berkshire, and Warren Buffett told CNBC’s “Squawk Box” in October 2013 that Benjamin Moore had generated $1.5 billion in profit over the previous decade.
Independent Dealer Strategy
Since its founding, Benjamin Moore has sold its paint through a network of independent dealers. The dealer network encompasses 6,500 stores coast to coast, and the company sells its paint internationally as well, with a growing presence in China and Russia as the stand outs.
However, the place you won’t find Benjamin Moore paint is in big box stores, such as Lowe’s and Home Depot.
The Growth of the Big Box Store
The big box stores that are leaders in the do-it-yourselfer retail category have undergone explosive growth, with Home Depot claiming the record for fastest growth of a retail outlet. Founded in 1978, Home Depot reached its 100th store in 1998, and by 2011, it had 2,248 locations in the United States, Puerto Rico, Canada, and Mexico. Similarly, Lowe’s operates more than 1,830 stores within the same geographic area. Combined, they represent over 4,000 locations, with each one doing many times the business of a mom-and-pop store.
Where is Benjamin Moore?
The rise of the big box stores would seem to leave Benjamin Moore on the outside looking in, so why isn’t Benjamin Moore on the inside?
The answer is simple.
If Benjamin Moore made its paint available to Lowe’s and Home Depot, it would devastate the independent dealer network. The independent dealers count on their product exclusivity to protect their pricing and sales model. And, Buffett’s promise to protect that dealer network was such that when he got wind of Benjamin Moore’s CEO Denis Abrams plan to start selling to a major retailer, Abrams was fired on the spot.
Keeping a Promise
The move protected the independent dealers, but the deal also did something else. It protected Berkshire Hathaway’s reputation for living up to its word, especially when it comes to acquisitions.
Berkshire Hathaway’s sterling reputation for honoring its word has become another bullet in Warren Buffett’s famed “Elephant Gun.” It helped him land Iscar Metalworking Companies in 2006, when he received an unsolicited letter from Iscar’s Chairman Eitan Wertheimer offering to sell Iscar to Berkshire. Seven years later, Wertheimer cited his great relationship with Buffett and Berkshire as one of the reasons he felt comfortable selling his remaining 20% interest to Berkshire in 2013.
A Priceless Weapon
As Buffett goes on the hunt for the next elephant, he’s got $30 billion in cash in his arsenal. He’s also got the priceless value of keeping his word.
Hopefully, his successors will recognize the power of that weapon too.
© 2014 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.