Is Warren Buffett Predicting the Fall of Retail?

On Tuesday, Berkshire Hathaway revealed its latest stock holdings, announcing to the public which shares it increased or decreased during its fourth quarter. The biggest findings from its report was that it increased its shares in airline stocks, specifically American Airlines, United, and Delta, and decreased its shares in Walmart and Verizon. I want to focus on Walmart – the largest retail store chain across North America – because Buffett’s Berkshire Hathaway had nearly 13 million shares and now has just over 1 million.

Any other firm dropping its shares in Walmart might not be a big deal, and probably wouldn’t even be news, but Warren Buffett’s case is different. He has experience with retail stores, and has been seen as almost prophetic at times with regards to the industry. In 2005, Buffett was asked about Eddie Lampert, CEO of Sears. At the time, Kmart and Sears were both under Lampert’s Sears Holding Group. Buffett said, “Eddie is a very smart guy but putting Kmart and Sears together is a tough hand. Turning around a retailer that has been slipping for a long time would be very difficult. Can you think of an example of a retailer that was successfully turned around?”

Here we are in 2017, and Sears Holding Group has recently been given a $200 million loan from Lampert’s own hedge fund. Over the last two years, Lampert’s hedge fund has lent over $1 billion to Sears. Retailers have been struggling for a while, which makes the question Buffett posed 12 years ago relevant once more, and maybe he asked himself that same question again before choosing to decrease his shares in Walmart.

Image result for macys store closing sign
Sears have already announced they will close 42 stores and 108 Kmart stores in early 2017.

Of course, we cannot forget that Walmart is in no way the same as Sears. In fact, compared with other retailers like Sears, Macys, JC Penny, and others, Walmart looks very good, with reported overall sales of $482 billion last year. Buffett’s skepticism comes from comparing Walmart to the industry that most experts peg as the cause of retail’s plunge: online shopping.

Former Walmart CEO Mike Duke said in 2012 that his biggest regret is not investing in more e-commerce to better compete with Amazon, saying, “we should have moved faster to expand this area” While Walmart’s overall sales of $482 billion are four times as large as Amazon’s, the positives stop there. Amazon’s online sales were $107 billion last year and Walmart’s were $13.7 billion. Amazon’s market value is $356 billion, while Walmart’s is $298 billion. In the past two years, Amazon’s shares have risen 119% while Walmart’s have fallen 21%. Buffett, the billionaire investor, sees Walmart as declining, and is dropping his shares now before Walmart – and retail – are finished for good. But will Buffett predict it right again as he did 12 years ago? To find out, we must look at what is causing retail’s downfall, and what retailers and doing to try to save their businesses.

The obvious competitor to retailers across the country is online shopping, with consumers choosing websites like Amazon over traditional stores like Walmart.  One reason is that shoppers today like to compare prices, and are more conscious than ever before about whose prices are the lowest and whose deal is the best. Some industry experts such as Forbes contributor Barbara Thau think retail stores such as Macy’s actually have too many sales. When consumers walk into the stores, everything says “sale”, and it becomes very difficult to wheedle through items to try to find what the best deal is. Amazon, for example, tells you exactly how much something costs and you can compare the price of similar items with one click. Simply put, retail stores are convoluted, while online stores are concise. Thau writes that stores are trying to become “internet proof” by providing customers with experiences rather than just shopping, because shopping is no longer seen as an experience on its own anymore. This is why malls have been adding restaurants and fitness centers in addition to the conventional stores. Macy’s CFO Karen Hoguet said “we need to make the bricks-and-mortar experience a lot more exciting”. Notice her usage of the words “experience” and “exciting”, something retail stores have lacked over the years.

Walmart, at the moment, appears to have its head above water. Even Target, its largest retail competitor, also appears fine. However, growth rates have slowed, and investors are noticing. Warren Buffett certainly has, and when we look back at his decision 10 to 15 years from now, I think we might all say, “he called it again.”


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