Warren Buffett: Small Businesses Can Beat Big Companies | University of Georgia 2001

[Transcript]

AUDIENCE MEMBER: My question pertains to small business. And my family has been in the truckload sector of transportation for about 50 years. And as you talked about the airline industry and all of the mergers and acquisitions and things going on, a lot of the smaller players being tossed out of the market. What do you see for people that, like in this room, for students that want to start a small business and maybe they want to start in a business that is a somewhat of a commodity-type business? But as businesses—the large corporations get larger and their efficiencies increase, how can a small business compete with these people?

WARREN BUFFETT: It depends. In many areas, small businesses have an advantage. You know, in other businesses, scale has a huge advantage. And I mean, you don't want to be a tiny carbon steel producer. On the other hand, when mini-mills came along and learned how to use scrap more effectively than the older methods of making steel, they actually had an advantage.

So scale is a huge advantage in some businesses. It's—you know, the largest airlines haven't won. Southwest Airlines has won, starting with, you know, just a few planes flying down there between Houston and Dallas. And they have become bigger, but their ambition hasn’t been to be the biggest. And then, you know, they probably buy their fuel at just as cheap as United. They probably bought it, you know, when they were a lot smaller.

Walmart is a classic example. I mean, who would have thought 25 years ago—30 years ago, I mean—here was Sears with a hundred-story-plus building in Chicago—had access to money far cheaper than Sam Walton. I mean, Sam Walton’s credit was not as good as Sears. Every supplier wanted to do business with Sears and nobody had ever heard of Sam. Every real estate developer who was developing a new shopping center went first to Sears, you know, and Sam got the short end.

So here is a guy starting in Bentonville, Arkansas, and he kills them over time. Just plain kills them. A disadvantage in buying, a disadvantage in borrowing, a disadvantage in real estate. Advantage? Sam Walton and his ability to inspire, in the end, hundreds of thousands of people to be enthusiastic about going to work and doing all the—doing the right things over time.

So I would be just as optimistic about small business generally—now, there are certain areas where scale just is—is just plain important, but I see no disadvantage.

We intentionally—at Berkshire, we have 112,000 employees—more in Georgia than in any other state in the union, incidentally. We employ a lot of them near Dalton and we employ a lot of people in Macon at GEICO. And we intentionally—with our 112,000—but we probably have I don't know how many business units but lots, and we only have 13.8 people at headquarters. I’m not the 0.8 incidentally. I resent it when people think that I’m a full (employee), but we have one woman who works four days a week. And that’s all we have at headquarters.

112,000 people (in the company as a whole), $105 billion of market cap. But we intentionally keep our units small. We think—we want them to have the nimbleness, the responsiveness to the customer particularly, that will turn them, you know—that essentially will more than offset anything—that the scale of having maybe a little more purchasing power or something will develop.

We own a home furnishing—we have furniture—home furnishings business in Utah run by a fellow named Bill Child. He was featured in Fortune about one issue ago—that the cover story was “God and Business”. Bill was the No. 1 illustration.

Bill took that business from his father-in-law when it was doing $250,000 a year. And he now does over half the business in Utah in his field but close to $400 million. He built it by thinking about the customer. And the truth was, he was competing with Sears. He was competing with Levitz, which was a huge furniture retailer in the past. He was competing with everybody. But all he thought about from the moment he got up in the morning was, “How do I take care of my customer?” And that wins.

We have a business in Omaha. Some of you may have heard of. It’s the largest home furnishing store in the world—in Omaha, which only has an SMSA of 650,000 people. It’s on 72 acres. It does $325 million in one location, which happens to be $500 for every man, woman, and child in the SMSA, but it draws from beyond that.

That business comes about or has resulted from an investment of $500 in 1937 by a woman who walked out of Russia in 1921. She land—she walked out, got on a peanut boat, landed in Seattle with a tag around her neck—she couldn’t speak one word of English. The American Red Cross looked at the tag, it said “Fort Dodge, Iowa”. They got her to Fort Dodge, Iowa. She couldn’t pick up the language.

She was there two years. She said she felt like a dummy, so she came to Omaha because there were other Russian Jews there and she’d at least have somebody to talk to. Her little girl started school, Frances. Frances would come home at night and teach her mother the words she learned in school that day. That’s how this woman, Rose Blumkin, learned the English language—but from her daughter from kindergarten on, teaching her the words.

She brought seven siblings over from Russia, one at a time, $50—every time she saved $50. She sold used clothing and other works. She got her seven siblings over, her mother and father, and by 1937, 16 years after she got here, she had saved $500.

She got on a train and went to Chicago to the American Furniture Mart, which was this huge impressive thing. She had this—she was smart as hell, but she thought like a peasant in a way. She saw this building, she decided to name her company the Nebraska Furniture Mart.

She went in bought $500 worth of—she bought about $2,000 worth of merchandise. All the way back to Omaha, she worried because she thought, “I owe $1,500,” and she only had a $500 equity. So she got to Omaha, she took the bed, the sofa, the refrigerator out of her own home to sell fast so she could get the money so she could pay on time.

She took that business and built it from that start.

No one would sell to her. She went into court four times because they tried to—the carpet manufacturers tried to keep her from selling at a discount. And she went into court and told the judge—because she figured out ways to buy this stuff in various nefarious ways, from other—had other people buy it for her—and she said, “Look, I paid $3 a yard for this carpet. Brandeis sells it for $6.98. I sell it for $3.98. Just tell me, judge, how much you want me to rob people?”

She defended herself. The papers wrote it up. The judge bought carpet from her the next day. I mean, it was marvelous. (Laughs)

Brandeis isn’t selling anymore. They were the huge department store in Omaha. She put everybody out of business.

And the punchline—she worked until she was 103. She sold me the business when she was 89. And she didn't have an audit. I went out to see her one afternoon. I took a check out with me because I knew she wanted to do something, and I said, “Mrs. B, here's the money. I don't need an audit. Just tell me whether you owe any money.”

She said, “I’ve never owed any money since I owed those guys back in 1937. It’s all free and clear.”

She had never seen a balance sheet. She didn’t know what accounting terms meant, but she understood the nature of the business.

And I told her, “I’d rather have your word than an audit from every one of the Big Six or Big Eight—or whatever number they were at the time—of the top auditing firms.”

And she worked until she was 103. She died at 104. She had three siblings at her funeral. I mean, those are some genes. Her son works there now. He’s 82 or 83 and the three sisters are all alive.

But the punchline is, she couldn’t read or write. This woman could not read or write. If you told her this room was 68 feet by 43 feet, she would tell you how many square yards. It was like that.

She never went to school a day in her life. She would tell you how much that was at $5.98 a yard. She’d add the tax. She’d knock off something because she liked your looks, and that would be it.

And that would—that's—you know, that is the—that—you can't beat that, you know. And you can’t replicate that at General Motors. You can’t institutionalize that. The person who brings that kind of drive to a business and does it day after day and thinks about their customer. And that’s all she did. She raised four kids in the process, too.

But you can't—it can't miss. And no, you don't have to worry, if you’re an entrepreneur or in most fields. There are some fields where you can’t do it because there are scale aspects to it. But, in most fields, you’ll kill people.

Bob Shaw did that with Shaw. Nobody had ever heard of Shaw in carpet 30 years ago. And he’s got 40% of the carpet business in the country.

So don't—I—it's a great field of opportunity out there. And I had the—I don’t know about trucking specifically, but I wish you the best on it. And you won’t be at a disadvantage in many fields if you’re small, and you’ll actually have an advantage.

Thank you. (Applause)

Source: https://youtu.be/2a9Lx9J8uSs?si=hvfkap4Rvr_pCtVY

 

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