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Notes From Bob Batt's Talk at the Berkshire System Summit

- By Grahamites

Earlier this month, I made my eighth consecutive pilgrimmage to Omaha, Nebraska. This year, I signed up for Bob Miles' Berkshire System Summit for the first time. It was a great event and I highly recommend it to everyone who is attending future Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) annual meetings. This year's speakers included Don Wurster from National Indemnity, Tony Nicely from GEICO, Bob Batt from Nebraska Furniture Mart and Ron Olson from Munger, Tolles & Olson. Below are my notes from Batt's presentation and question-and-answer session.

Batt is the former executive vice president of Nebraska Furniture Mart and the grandson of Rose Blumkin. He began working for the company at age 14.

Brief introduction of the history of Nebraska Furniture Mart

After the depression, things got really tough. Blumkin had an idea to make money - selling furniture from her basement. Everyone in the family worked in the business and they all worked hard, even on weekends. The goal had always been to sell cheaper furniture. After founding, the business got bigger and bigger. During the 1940s, Blumkin came up with the idea of being all-inclusive, meaning the company would sell not just furniture, but also appliances and electronics, whereas most other furniture stores only sold furniture. One thing Nebraska Furniture Mark found out early is most decisions about home furnishings are made by women, so they tried very hard to cater to what they wanted.

The company moved to an uptown location after World War II. After dominating the Nebraska market, it opened another store in Kansas City in 2003. Then, the company scouted places all over the country and settled on Dallas for the next store.

Biggest change in the business

The sourcing of products was the biggest change. Most of the sourcing was done in North Carolina, South Carolina, Virginia and Michigan. Today, most is from China. Globalization is here to stay. Batt went to China directly and formed buying groups with local retailers, getting a good selection and good price.

Why retailers fail

Sometimes retailers do things based on ego and forgot who their clients are. Nebraska Furniture Mart never forgot that customers are always number one. Batt's favorite quote from Sam Walton is: "If you don't take care of your customers, somebody else will." It's true in all businesses. The worst example is Sears (SHLDQ). The ego of the CEO ruined the company even before Eddie Lambert took over. It lost focus.

When people go to department stores, research shows the number one thing they want is a clean restroom. The second thing they want is a clean environment and updated interiors (walls, etc). Sears flunked in both and so did J.C. Penney (JCP). Nebraska Furniture Mart tried to dominate in every section of the business it operates in. You always have to look out for what's going on, what other guys are doing.

Why Dallas? How did you go about choosing the location in Dallas?

Dallas has millions of people. There's no market dominator. It's a very fragmented market.

Nebraska Furniture Mart's team went to 10 states and surveyed the economies of local cities and locations. Originally, St. Louis was the top choice, but local government wasn't receptive and they didn't understand the concept of the furniture.

Batt said the main consideration in terms of location is "we don't want our customers to be hassled to come to see us." As such, the location needs to have major intersections and roadways that you can get in and out easily. In Dallas, the company looked at a few locations, but traffic problems couldn't accommodate the flow. Finally, they found a piece of land with nothing built on it and good traffic flow. The company also did a lot of negotiation with local government so it could build new intersections and new overpasses. It's easy to get into and there is plenty of free parking.

But that's not enough. Retailers have to remove all the barriers to why people don't want to come. So, Nebraska Furniture Mart went around the world to look for the best practices. It found there are two things people don't like - waiting to pay money and waiting to pick up their products. So the company developed systems for faster payment processing and picking up merchandise. The company's representatives aslo studied at Disney University on how to deal with crowds, how to keep them happy and how to keep them entertained. They transferred what they learned from Disney to Nebraska Furniture Mart.

The company also had to make sure it's extremely safe with security cameras and security guards. As a result of implementing these strategies, Nebraska Furniture Mark grabbed market share right away.

Negotiations between Blumkin and Buffett

Twenty years before the purchase, author Adam Smith was driving around Omaha with Warren Buffett (Trades, Portfolio) and they drove past the Nebraska Furniture Mart. Smith said it looked like an interesting place and asked Buffett why he hadn't bought it. Buffett said, "Someday I might."

When Buffett decided to pursue buying the company, Blumkin was getting older and wanted continuity. The deal was a handshake deal. Blumkin told Buffett how much she was willing to sell for and he told her what price he wanted to pay, and they agreed on it. There was no audit, no inventory taking and no checking on the bank balance. The deal was closed in a few minutes.

The family's involvement after being acquired by Berkshire

One thing the family learned about Berkshire is its protocols. One protocol is don't ask about things that don't concern you. Focus on the mission of what the company does - selling goods and services. Never ask about anything outside of Nebraska Furniture Mart. Their job at Berkshire is to generate cash flow so its parent company can make better use of the cash.

What changed after NFM was acquired? Were you thinking about buying other businesses?

The retailer has no interest in growing faster than it already has. The limit to its growth is the talent pool - managers, truck drivers etc. When it opened the Kansas City store, 25% of the Omaha staff moved there. The same thing happened with the Dallas store. The company has to be careful in not growing for the sake of growth because its duty is not to cause Berkshire any headaches or embarrassment.

How much of your focus is on foreign markets versus U.S. How has the current trade dispute affected your business?

The trade war does no one any good. It will hurt both sides. They'd rather do good things. What Batt has learned in China is if you keep everyone working and producing and they have the basics of food, shelter and clothing and a chance at a decent life, they'll never go to war with the U.S. Trading with China will benefit American consumers and American businesses.

What other retailers do you admire?

Batt said you have to admire Walmart (WMT). He also admires Amazon (AMZN) after it started paying sales taxes. Ikea is a great company. One thing Batt doesn't like about Ikea is when you go in, there's one door and you have to go through their maze and come out from the exit. They try to control your behavior and what you see and do. The do-it-yourself model can be a turn-off for people who are not very good at tools, but they have a lot of things that work.

Within Berkshire there are other furniture retailers. Do they share best practices?

All four furniture retailers are very different. They always learn from each other every day.

How do you make people feel special?

You spend a lot of time and effort in understanding their needs. You make it friendly for them and deal with what they want. At Nebraska Furniture Mart, they always ask customers whether the products meet their needs, design, color and price points. They remodeled the store to make it nicer, friendly and keep it up to date.

In terms of staff, Nebraska Furniture Mark has sales people who have worked for the company for more than 60 years. It always hires refugees because they make the best workers no matter where they are from because they are happy to be in America. The company hired them when they were young and they are still there. They started from the bottom level and moved all the way up. There's a great continuity in the team at every level.

Blumkin had a favorite quote: "Nothing is forever." Things change and you have to have a continuity plan. Berkshire and its subsidiaries are very heavy in its continuity and succession plan.

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This article first appeared on GuruFocus.