The history of the Nebraska Furniture Mart starts with the history of its founder, Rose Blumkin. A Jewish immigrant and one of eight children, she was born in a small village in Russia near Minsk on December 3, 1893. In 1917, she followed her husband of four years, Isadore Blumkin, to the United States. Blumkin, who came to be known as “Mrs. B,” came from a modest background and never received a formal education. What she had instead were guts, determination, and an iron will to succeed. In 1919, she helped her husband open a second-hand clothing store, which ran relatively successfully for the next decade. But when the Depression hit, and her customers had little money, Blumkin came up with a proposition that fit the times—dressing a man from head to toe for $5. She distributed 10,000 flyers, and through her ingenuity drove sales when most of her competitors were shutting their doors.1 In 1937, with $500 of savings, she opened the Nebraska Furniture Mart in a basement room across the street from her husband’s clothing store.2 Blumkin was 44 years old at the time.
For the first few years, business was not always easy. At one point, Blumkin even sold the furniture in her own home to make good on her payments to suppliers. When her children came home to find their beds missing and their living room completely devoid of furniture, she told them, “Don’t worry, I’ll buy you better beds. We’ll have another kitchen table. But I owe this person money, and that’s what’s most important.”3 Blumkin made good on her promise to her children, as she did with all her promises to pay suppliers.
Figure 11.1.
Updated logo for the iconic Omaha store
The concept behind Nebraska Furniture Mart was simple: Buy quality items that customers wanted and sell them cheaper than anyone else. When competitors balked at her low prices and put pressure on local suppliers to boycott her, Blumkin simply went to other cities—Chicago, Kansas City, New York, wherever she could—to buy the products that her customers demanded.4 With her relentless focus on bringing the best value to her customer, she turned Nebraska Furniture Mart into a beloved local establishment. By the mid-1970s it had become so dominant in Omaha that numerous retail chains refused to put stores in the city because they did not want to compete against her.5
The story has it that on a summer day in 1983 Warren Buffett walked into Mrs. B’s store and, after only a short conversation and a firm handshake, agreed to buy 90 percent of Mrs. B’s business for $60 million.6 Blumkin, who was 90 years old at the time and who had been thinking about the future of her business, decided this proposition made sense for her business and her family. In the spirit of two fair parties with nothing to hide, the deal was quickly finalized. Mrs. B remained chairwoman of the business and stayed on the sales floor seven days a week, as she wished, and her son Louie Blumkin maintained his longtime role as president of the business.7 In his 1983 annual letter, Buffett called his acquisition of a majority interest in the Nebraska Furniture Mart and “the association with Rose Blumkin and her family” the high point of his year.
What would potential investors considering the business at the time have seen? Without access to the financials of the private business, they would still likely have been able to find out the history of the celebrated business. They would also know some key facts: that the Nebraska Furniture Mart was a single store in central Omaha, selling a full range of home furnishings from sofas to kitchens to appliances. With an estimated 200,000 square feet of floor space and $100 million in sales, it was by far the largest furniture locale in the area. As Buffett commented, “No other home furnishings store in the country comes close to that volume. That single store sold more furniture, carpets, and appliances than do all Omaha competitors combined.”8 Nebraska Furniture Mart certainly had local brand recognition and a local scale advantage—whether it was in advertising (posting in The Omaha World-Herald) or in purchasing (buying kitchen cabinets from local suppliers). While the store would not have purchasing advantages over some national store chains when sourcing from national suppliers like General Electric or Whirlpool, Nebraska Furniture Mart still had a major advantage in having the largest single store—it had the widest selection of products, so when a potential customer in the area wanted to furnish a home, they were more likely to find what they wanted there than anywhere else. Locally, Nebraska Furniture Mart was a giant fish in a small pond.
Potential investors also could have determined the store’s customer interface: it bought directly from suppliers and sold directly to its customers, adding only a small markup from wholesale prices. Here several aspects are important to understand. First, Nebraska Furniture Mart practiced what today would be known as the discounter concept. Like Aldi, Lidl, or Walmart, the business focused on getting its customers the best value proposition based on price, passing its cost savings to the customer in the form of lower prices. Like-for-like, customers actually got the best value, and a virtuous circle ensued of low prices leading to more customers, leading to greater scale and cost savings, leading to even lower prices for customers. Blumkin was practicing this concept before Walmart or Aldi were successful in doing so on a national and international level.
Moreover, Nebraska Furniture Mart also had a cost advantage. Because Blumkin disliked having debt and generally paid cash for everything, Nebraska Furniture Mart’s overhead expenses were at “ratios competitors don’t even dream about,” according to Buffett. It had neither interest payments nor operating leases to weight it down. In fact, in a later interview, Blumkin revealed that store expenses were just $7 million annually in 1983, meaning overhead costs, incredibly, were only seven percent of revenue, which were $100 million.9 For comparison’s sake, 1983 selling, general, and administrative costs for Walmart—itself a lean operation—were 19.8 percent of revenue, not including another one percent of revenue in interest payments and leases.10 So even compared to Walmart’s overhead expenses, those for Nebraska Furniture Mart were merely one-third as a percentage of revenue. The impressive low-cost basis was one more obvious reason why Nebraska Furniture Mart was able to sell much cheaper than competitors and still be more profitable.
Finally, even without having the usual financial statements of a public company, it was obvious that Nebraska Furniture Mart had impeccable operating metrics. The $100 million revenue on 200,000 square feet of retail space meant sales of $500 per square foot. Nebraska Furniture Mart handily bests Walmart here as well. With sales of $3.37 billion and reported a total retail square footage in their around 550 stores of 25.825 million square feet in 198311 had sales per square foot of only $130.
In sum, even though potential investors would not have had full financial information, Nebraska Furniture Mart would still have looked like an extremely well-run business with a few distinct local advantages. It was a simple business that had advantages in brand name and local scale, and—most important—was run by an impossible-to-match Rose Blumkin.
Valuation
Buffett offered $60 million for 90 percent of the business. He also offered an option for key members of the Blumkin family to buy back 10 percent of the equity for $5 million, which was subsequently exercised, so the final price for Berkshire was $55 million for 80 percent of Nebraska Furniture Mart. This valued 100 percent of Nebraska Furniture Mart at $68.75 million. Pretax earnings in 1983 were approximately $15 million,12 suggesting an after-tax profit of $8.1 million.13 For the 1984 fiscal year, the exact earnings of Nebraska Furniture Mart from Berkshire’s annual report are available: pretax earnings were $14.5 million, and after-tax earnings were $7.4 million. In addition to the earnings power of the business, the business had cash on hand as well as significant value in the inventory of goods it held. Although a potential investor would not have known the exact figure, because most assets were paid for and the business had no debt, a rough estimate could probably have been made without difficulty. A later audit showed that the balance sheet value of the business was $85 million.14 Table 11.1 summarizes the valuation multiples.
Table 11.1.
Valuation multiples
| |
1983 estimated/actual |
| Net income |
$8.1 million |
| PER |
8.5× |
| EBIT |
$15.0 million |
| EV/EBIT* |
4.3× |
| P/B |
0.80× |
*Assumption of $5 million net cash figure.
No matter how one looks at these figures, the price paid for Nebraska Furniture Mart was extremely reasonable. Buffett paid less than nine times after-tax earnings and less than five times EV/EBIT, which was especially cheap as Nebraska Furniture Mart almost surely had net cash.15 The valuation was especially attractive considering that the business had grown from nothing to $100 million revenue, and there were no signs that this growth would stop.16 Moreover, in addition to the downright cheap earnings-based valuation, the whole business valuation had downside protection in the form of the assets of the store and inventory. Blumkin had realized the value of her inventory many times in the past, so there would be no reason to believe that it would not be possible again if it were necessary. In the unlikely case that the business were to become loss-making, Buffett could sell the assets and still realize a gain (as he had done earlier with Dempster Mill). From a valuation perspective, this was a dream acquisition.
Without even doing a formal audit on receivables or inventory, Buffett wrote a check to Mrs. B, knowing that she was good for her word. Looking at the business and the price, I would not be surprised if a potential investor with this opportunity would have done the same. Nebraska Furniture Mart was a superbly run business that depended on good execution, but it had also built important structural advantages over time. For a price that seemed to greatly undervalue the business’s inherent ability to generate cash earnings and that would also have been fully covered by just its net asset value, it was a great buy (even by Buffett’s lofty standards). From Buffett’s perspective, however, this seemed foremost to be an investment in people—Mrs. B and her family. Nebraska Furniture Mart was exceptional because of how Mrs. B had made it so, and to ensure that her family would continue to have a part in running this business as they had done for decades, Buffett made sure that the family retained a 20 percent stake in the business.
After the purchase by Buffett, Nebraska Furniture Mart continued to grow and be very successful. By 1986, revenues had increased to $132 million, and pretax earnings had increased to $18 million.17 Buffett would remark that “Nebraska Furniture Mart appeared to be doing just about all of the business available in the Greater Omaha Area…[while other] competitors come and go (mostly go).” By the late 1980s, a dispute about how to run the business developed between Mrs. B and her grandsons, who had succeeded her son Louis in running the Nebraska Furniture Mart operation. It escalated to the point of Mrs. B, at age 95, opening a competing carpet store across the street from Nebraska Furniture Mart in 1989. But the family, with some help from Buffett, soon reconciled. There was no lasting damage to Nebraska Furniture Mart, and the business continued its incredible performance into the next decade. Mrs. B lived to an equally incredible age of 104, spending her last weeks in close touch with the business that she had built from nothing more than an American dream.
