Beginning in 2009, however, the economic recession reduced the value of all asset classes.31 For NetJets’s vast airplane fleet, that meant a $700 million write-down, erasing several years of profits and tallying a large net loss that year.32 The debt, of course, remained, by then $1.9 billion. With expenses also running high, Buffett began to see problems at NetJets, arising from its sizable debt and capital needs, reduced asset valuations, and the cost of its young European division. In doing so, Buffett said he had “failed” Berkshire shareholders in his stewardship of NetJets.33 While continuing to applaud Santulli’s record for customer safety and satisfaction, Buffett in late 2009 sent in a new chief executive to prune costs and pare debt.
The new chief, David Sokol, who had intervened at Johns Manville in 2007, was also on the short list to succeed Buffett. Sokol cut costs aggressively, as he had when building MidAmerican Energy, but doing so at NetJets was a high-wire act, given that it offers a premium brand, not a low-cost commodity product. Sokol’s process was painful, summarily firing employees, selling assets, and provoking resentment within the company for failing to respect the NetJets corporate culture, including its entrepreneurial roots and high-end services.34 Also controversial: in late 2010, NetJets acquired Marquis Jet Partners, a firm that sells thinner slices of NetJets offerings, down to 1/32 of an interest.
In early 2011, however, Sokol resigned from Berkshire under a cloud for buying stock in the Lubrizol Corporation a week before pitching the company as a Berkshire acquisition, a story that will be recounted in the next chapter. Sokol’s successor at NetJets, Jordan Hansell, an Iowa lawyer Sokol had named as chief counsel for NetJets, now steers the entrepreneurial firm between the premium brand it is and the budget consciousness of Berkshire culture. Santulli, for his part, launched a new helicopter-leasing business, Milestone Aviation, whose pilots, naturally, train at FlightSafety. His company prospers today; Buffett and Santulli remain good friends.
Moats include becoming the low-cost producer in a commodity business—as with Berkshire’s furniture stores—or being the only or a leading producer of a desired service—as with FlightSafety and NetJets. Clayton Homes developed a moat through an unrivaled commitment to customer affordability; Benjamin Moore carved out a niche in the high end of the paint business. Other business models at Berkshire include honing a unique distribution channel (e.g., the direct-sales marketing of Scott Fetzer’s Kirby vacuums) or providing commercial items that save business customers money (ISCAR/IMC).
Product branding is among conspicuous and commonly cited sources of business moats. Many people seem to believe that Buffett’s investment tenets limit him to companies with brand-name recognition, like American Express or Coke. Such branding is valuable to help a company generate and maintain market leadership and profitability, but this view of Buffett misses more than half the picture at Berkshire. Of the entrepreneurial routes to creating a moat, branding is one of the more difficult. It takes a combination of appeal, skill, and luck—a desirable product creatively pitched that clicks for often-inscrutable reasons.
The combination worked for Garanimals, a line of children’s products launched in 1972 by Garan Inc., a company whose entrepreneurial spirit not only helped to propel that brand but to overcome adversity facing American textile manufacturers. The company was formed in New York City’s garment district in 1957, when seven competitors merged, choosing the name Garan as an abbreviation of guarantee (which is how the company’s name is pronounced).35 Sports shirts were its biggest seller, made in factories in Kentucky and Mississippi and mostly sold under private labels through mid-market department stores like R. H. Macy’s, Sears, and F. W. Woolworth’s.
In 1961, Garan went public, raising funds to finance its own receivables without having to rely on “factors,” third parties who manage and collect merchandisers’ receivables for a percentage of the balance, a standard but costly industry practice. A majority of shares were acquired by senior managers, including the president, Samuel Dorsky, and his number two and successor, Seymour Lichtenstein—another Berkshire chief who has spent a fifty-year career with his company.
Sales and profits rose as Garan diversified product lines and leased or built more manufacturing facilities in numerous locations across the South. After a rough patch in the late 1960s and early 1970s due to the pervasive problem of rivals using cheap foreign labor and international shipping, Garan regained its footing by imposing cost controls, decentralizing, and increasing productivity.