Berkshire Beyond Buffett(29)
Take RC Willey Home Furnishings, a furniture store chain based in the western United States that the Blumkin family brought to Berkshire’s attention. Berkshire acquired RC Willey in 1995 for $175 million, a price the selling family accepted despite receiving several competing offers greater than $200 million, attributing the difference to Berkshire culture.7 For those eager to compute exchange rates between cultural traits and economic values, this case gives you a quantitative value for Berkshire’s culture: in this case, it was worth $25 million to a family that owned a $200-million business—or one-eighth of the total in the exchange. The family received the funds plus the value of Berkshire culture; Berkshire gained a company that fits into its culture and helps to reinforce it.
RC Willey is a characteristically Berkshire company, beginning with its entrepreneurial founding in 1932 during the Great Depression. Like Samuel Tatelman, who sold furniture from his truck in Boston before opening Jordan’s Furniture, Rufus Call Willey sold home appliances door to door in rural Syracuse, Utah, out of the back of his red pickup truck.8 An electric company employee, Willey’s moonlighting involved marketing Hotpoint brand ranges and refrigerators to people not yet accustomed to the electricity newly supplied to the area.9 His employer encouraged this side business, as appliance usage stoked demand for electricity.
To entice sales, Willey let customers try the novelties for a week before committing; to close the deal, he would arrange three-year installment plans with seasonal payments due at harvest time. During World War II, when sales fell, Willey expanded his side business to include refurbishing used appliances he recovered from salvage yards. After the war, when sales rebounded, Willey established a small store adjacent to his home.
Pancreatic cancer cut Willey’s life short in 1954, and people wondered whether the business could survive without RC. As a company history notes, “To his customers, RC Willey was the company.”10 His business would in fact continue under the leadership of his son-in-law, William H. (“Bill”) Child, and Bill’s brother Sheldon. Many family members joined them as employees over the years: their father; Bill’s eight children and two sons-in-law; and Sheldon’s two sons and one son-in-law.11
Child adhered to the values Willey had applied in building his business, especially his religious and work ethics and creative customer service. One thing changed, however. Willey had been a big spender and a naïve creditor, lending to customers with poor repayment histories. The result, when Child assumed control, was a company with more debt and weaker assets than expected. It took Child several years to stabilize the company’s financial condition.12 That harrowing experience taught Child indelible lessons in frugality. He rebuilt RC Willey without borrowing funds and by running credit checks on all customers.
After securing the company’s finances, the Childs expanded the appliance business to include furniture and steadily enlarged the footprint of their store, growing it over the years from a mere six hundred square feet to one hundred thousand square feet. They opened a second store in 1969 and gradually added stores throughout the 1980s and 1990s, and also opened a large distribution center in Salt Lake City. To acquire the second store, rather than load the company with debt, Child used personal funds to buy land and construct the building and then leased the premises to the company until it could afford to own the land and store outright.13
Customer service ran the gamut from small courtesies to extraordinary acts. At the stores, the Childs offered free hot dogs to all its shoppers and small complimentary gifts like tape measures and yardsticks.14 Deliveries were punctual, and the stores stocked as wide a range of lines as possible at the lowest possible cost. As for extraordinary service, in the early 1970s, the company RC Willey used to finance its customer warranties went bankrupt. Although RC Willey had no obligation to do so, it accepted responsibility and covered all the warranties.15 The cost: $1.5 million; the gain: priceless customer affection.16
In 1975, RC Willey led the furniture industry in offering customer financing by issuing store credit cards. Doing so eliminated third-party lenders, enabling the company to charge a lower interest rate while earning additional profits. The innovation had an added tax advantage. Taxes on cash sales were due when made, whereas taxes on credit sales were deferred until the full amount due was received. By the early 1990s, RC Willey’s profits from credit card operations exceeded $18 million annually, plus millions more from the tax advantage.17
Bill Child knew the Blumkin family from their roles in the furniture business. Irv Blumkin admired Bill Child and RC Willey and often mentioned this to Buffett.18 In early 1995, Child told Blumkin that estate planning had led the family to consider selling. Child wanted to be sure the company would continue for decades.19 Child sent Buffett the company’s financial statements. Buffett was impressed by a steady 17-percent annual growth rate in sales and profits and the fact that the company was debt free.20 Buffett promptly wrote back with a valuation summary. He and Child agreed on a deal and closed in short order. When Berkshire acquired RC Willey in 1995, it owned six stores and generated $257 million in annual sales.