Friday, November 02, 2012

Berkshire Hathaway Goes Nuts For Oriental Trading

Berkshire Hathaway (BRK-A) normally acquires financially healthy companies that possess a durable economic advantage.  The company has thrown that approach completely out the window by agreeing to acquire Oriental Trading Co. for half a billion bucks.  This transaction does not resonate at all with Berkshire's business model.

Oriental Trading emerged from Chapter 11 bankruptcy only last year.  Warren Buffett's famous aversion to money-losing enterprises should have kept him from even considering this company.  Oriental's business model is low-cost, commodified, and easily duplicated by any number of competitors.  There's no economic moat anywhere in sight.  A company that offers guaranteed lowest prices on 40,000 products had better have the kind of stranglehold on its suppliers that Wal-Mart uses to keep that kind of promise.

KKR no doubt relishes losing its original bid for Oriental and watching the Carlyle Group eat a big loss.  I wonder why Berkshire is handing KKR such a great payoff for taking a catalog retailer through Chapter 11.  Retail will be the first sector destroyed when the next leg of the prolonged U.S. downturn materializes.  Oriental Trading has to compete with every odd-lot trinket seller on eBay.  Berkshire is straying from the business model that has made it one of the best holding companies in American history.

Full disclosure:  No position in BRK-A, BRK-B, or Oriental Trading Co. at this time.