Berkshire Beyond Buffett(63)
Shaw Industries complemented its cost-driven internal growth of the early 1980s with growth through acquisitions thereafter. It seized a major opportunity in 1988 when a well-known leveraged buyout operator of the period, William F. Farley, targeted Shaw Industries rival West Point-Pepperell. Its diversified businesses included a carpet manufacturer. As a defensive response to the hostile bid, West Point-Pepperell sold the carpet business to Shaw Industries for $140 million. The deal boosted Shaw’s annual revenues above $1 billion. The next year it acquired the carpet business of Armstrong World. In integrating both companies, Shaw Industries revamped their cultures to align with its mantra of being the low-cost producer.
Despite emphasizing the competitive advantage of budget consciousness, in the mid-1990s, Shaw Industries made two mistakes. It tried to brand its carpeting and to enter the retail end of the business. Although both efforts failed, neither was illogical when Shaw Industries opted for them. The branding effort was made in the spirit—naïve but well intentioned—of educating consumers about the appeal of a product the company felt pride in. The retail strategy pursued vertical integration as a way to avoid reliance on other parties for business prosperity.
But the branding effort misread consumer appetite for information. Shaw’s branding program, called Trustmark, “sank in a sea of technical details,” providing yarn face weights and twist levels.27 The branding effort confused customers and posed high internal costs due to labeling, sampling, and shipping. Julius Shaw called the branding flirtation a “fiasco.”28
The retailing gambit did more severe damage. Hitting its industry like a sledgehammer, the strategy was almost impossible: keeping Shaw’s distribution prowess while going into competition with its customers. To launch the effort, Shaw Industries acquired four hundred stores, from both smaller retailers and two large chains; it then divested one hundred of these as unprofitable. The costs of acquisition and divestiture wiped out any profit that the retained stores might have made.
Trade publications expressed consternation, and customers were furious. As a business rule, wholesalers do not go into competition with their retail customers. (That is why McLane, the wholesale grocer and distributor, promised its convenience store customers not to compete with them, and why, when Walmart acquired McLane, it divested a group of convenience stores.) Shaw’s retail customers, the company’s lifeblood, felt threatened. Many, including large accounts like Home Depot, simply stopped buying Shaw’s products. Shaw Industries lost significant market share. Investors dumped its stock, sending Shaw’s market price tumbling.
Beyond that external onslaught, Shaw Industries could not manage its stores. When run by small independent retailers, the owner-managers were entrepreneurial workhorses. But after selling to Shaw Industries for a small fortune, these individuals (whom the company asked to continue as managers) preferred more leisure time. Shaw Industries had difficulty monitoring and motivating them. In short, the company was good at being a low-cost producer of carpets but had no knowledge of running the retail end of the business and faint hope of branding such a commodity product.
By 1998, Shaw Industries abandoned the branding effort and withdrew from running retail stores. It made up with as many of its retailer customers as it could. Bob Shaw announced a return to basics—to doing what had made Shaw Industries great, which was being the low-cost wholesaler of quality carpets. In that vein, Shaw Industries also made an important acquisition, adding Queen Carpet, a longtime peer and friendly cross-town rival, then controlled by the Saul family of Dalton. Queen cultivated a similar corporate culture: a budget-conscious entrepreneurial family business with a sense of permanence. In addition, Queen had gained much of the business Shaw Industries had lost to the exodus of its customers.
Shaw Industries is unlikely to repeat the kinds of mistakes it made when attempting to brand carpets and go retail. But these errors do not impair its entrepreneurial spirit of nimbleness that is so important to business prosperity. On the contrary, as American tastes in recent years have shifted from carpets to other floor coverings, Shaw Industries has expanded its product lines to include hardwood flooring. It still uses its own trucking and distribution facilities—among the competitive advantages contributing to its business moat.
In June 2000, Shaw Industries saw another acquisition opportunity. The prospective partner, however, faced potential asbestos liabilities from past actions, and Shaw Industries wanted to eliminate the risk with an insurance policy.29 Bob Shaw and Julian Saul made an appointment to discuss the insurance with Buffett. Although Berkshire agreed to write a policy of the size required, Buffett said it would not do so without a cap on its exposure. Shaw Industries opted to skip the merger.