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Collection: Warren Buffett - #120 'Internet'



Good morning. My name is Ronald Towell (PH). I’m from Brooklyn, New York, and very appreciative of your graciousness as a host for this wonderful weekend.

My question has to do with the — (Applause)

My question has to do with the retailing industry, particularly the department stores and mass merchants. My question has two parts.

Without resorting to comments about specific companies, may I ask your opinion as to the long-term prospects for growth and profitability of this industry group?

The second part of my question is, given the fact that it is difficult to pick up a newspaper or to be an investor without being bombarded by what is purported to be the potential for exponential growth in the internet e-business, particularly directly to consumers, which could possibly eat into the revenues of these retailers —

And even if we assume a relatively low impact of, say, 5 to 10 percent revenue reductions, and given the fact that top-line growth is critical to any business, especially the bricks and mortar retailers, with their high proportions of fixed overhead, what advice could you give to a CEO of such a company?

And in turn, based on the proceeding scenario, what would be your opinion of the medium and long-term prospects for this industry?


Well, that’s a good question, too.

And obviously, the internet is going to have an important impact on retailing. It will have a huge impact on some forms of retailing. Change them and maybe revolutionize them.

I think there’s some other areas where it’ll — the impact will be less. But anytime we buy into a business, and anytime that we’ve bought in for some time, we have tried to think of what that business is going to look like in five, or 10, or 15 years.

And we recognize that the internet, in many forms of retailing, is likely to pose such a threat that we simply wouldn’t want to get into the business. I mean, it — not that we can measure it perfectly.

But there are a number of retailing operations that we think are threatened. And we do not think that’s the case in furniture retailing. And we have three very important operations there.

We could be wrong. But so far, that, you know, that would be my judgment, that furniture retailing will not be hurt.

You’ve seen other forms of retailing where you’re already starting to see some inroads being made. But it’s just started. The internet is going to be a huge force in many arenas. But it’ll certainly be a huge force in retailing.

Now, it may benefit us in certain areas. I would expect the internet to benefit Borsheims in a very big way. And you noticed in the movie that we talked about coming online in May. There’s something up there now. But you’ll see a new format within a month or so.

Now, you might say in jewelry retailing, you know, with millions of things that you can click onto, 10 years from now, you know, who is going to be important in terms of online retailing of jewelry? I would argue that two firms have an enormous advantage going in.

I would argue that Tiffany has such an advantage. We don’t own any Tiffany. But I would say that because of their name — brand names are going to mean very, very much when you have literally, you know, thousands and thousands of choices.

People can’t — they have to trust somebody. And I think that Tiffany has a name that people would trust.

And I think Borsheims has a name that people would trust. And Borsheims sells jewelry a whole lot cheaper than Tiffany’s.

So I would say that people who are price conscious, but also want to deal with a jeweler that they trust implicitly, will find their way to Borsheims in increasing numbers, over the internet.

And I would say that people that like the blue box, you know, are going to find their way to Tiffany’s, over time. And they’ll pay more money.

But I don’t see them going for Brand X and buying fine jewelry over the internet.

So, I think that, with the brand that Borsheims has, and with careful nurturing of that brand, I would say that the internet offers Borsheims a chance to have the advantage in cost that comes from a huge one store location. And yet, also go into the homes of people in every part of the world. And that kind of a company should prosper.

There are other of our companies, I worry about. You know, I can worry about them being hurt in various ways.

GEICO is going to be a big beneficiary of the internet. We already are developing substantial business through it.

But I — if I were to buy into any retailing business, whether I was buying a stock of it or buying a whole business, I would think very hard about what people are going to be trying to do to that business through the internet.

And you know, it affects real estate that is dedicated to retailing. If you substitute 5 percent of the retail volume via the internet, where real estate is essentially free, you know, you can have a store in every town in the world through the internet without having any rental expense.

So, I would be — I would give a lot of thought to that if I were owning a lot of retail rental space. Charlie?


Well, I think it is tricky predicting the technological change. Either it will or won’t destroy some business.

When I was young, the department stores had a bunch of, sort of, monopolistic advantages. A, they were downtown where the streetcar lines met. B, they had sort of a monopoly on extending revolving credit. And D, they had one-stop shopping in all kinds of weather. And nobody else did. And they lost all three of those advantages.

And yet, they’ve done well, a lot of them, for many decades since. At other times, you get a change and you just get destroyed.

Our trading stamp business was destroyed by changes in the economic world. And our World Book business has been seriously hurt by the personal computer, and the CD-ROM, and so forth.

We agree, it’s a big risk. But it’s not easy to make predictions in which you have great confidence.


Yeah, if you go down to 16th and Farnam, where the streetcar tracks used to cross, that was the best real estate in town. And people signed 100-year, 50-year leases on it. And it looked like there was nothing more safe, because they weren’t going to move the streetcar lines.

The only thing was that they moved the streetcars. They just took and converted them into junk. And it seemed very permanent.

The advantage of the big department store, the Marshall Field in Chicago or the Macy’s in New York, was this incredible breadth of merchandise. You could go and you could find 300 different types of spools of thread, or 500 — you could see 500 different wedding dresses, or whatever.

And you had these million square-foot, and even two million square-foot, downtown stores. And they were these huge emporiums.

And then the shopping center came along. And of course, the shopping center created, in effect, a store of many stores. And so, you had millions of square feet now, but you still had this incredible variety being offered.

The internet becomes a store in your, you know, in your computer, and it has an incredible variety of offerings, too. Some of them don’t lend themselves very well, it seems to me, to the retailing. And, you know, and others do.

But Charlie’s right. It’s hard to predict exactly how it will turn out. I would expect, you know, automobile retailing to change in some important ways. And in part — in very significant part, influenced by the internet.

But, I wouldn’t — you know, I can’t predict exactly how that’ll happen. But I don’t think it’ll look the same 10 or 15 years from now. Zone 6.


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