Berkshire Hathaway 2009 Annual Meeting Audience Question # 25

There’s a big change in consumer behavior and it will last quite a bit longer

Warren Buffett:

Number 12.

Audience Member:

Good morning, Mr. Buffett and Mr. Munger. I’m Marc Rabinov, from Melbourne Australia.

I’m wondering if I could ask you how retailing, manufacturing, and service businesses have been severely impacted by the recession given the way consumer spending has changed. Is it likely the results will still be 20 percent below 2007 levels in three years’ time?

Warren Buffett:

I don’t know about three years’ time. Certainly those areas you named, to varying degrees, have been hit very hard.

Some of the manufacturing would tie in with residential construction. If we hold housing starts at 500,000 a year, you know, my guess is that in a couple of years at most, we would get something close to equilibrium in housing. Maybe quite a bit sooner.

Nobody knows the figures with precision.

But if you keep forming households at a million-3, or something like that, a year, and you create 500,000 new units and a few of the old ones burn down, and a few… you will reach equilibrium at a point that’s not ridiculously far in the future.

And that will make a big difference in our carpet business, and brick business, and insulation business, and paint business, and so on.

Retailing has been hit very hard. The higher the end of it, generally speaking, the harder it’s been hit.

There’s been a big change in consumer behavior. And I think it will last quite a bit longer.

I think for years, government was telling people to save. And now that they’re saving, they’re unhappy about it.

But I think that… I think the experience of the last couple years, I don’t think will go away very fast. I think it could last quite a long time.

So I would not think our retailing businesses would do great for a considerable period of time.

And I would say that in retail real estate, I would think that that would be a tough field to be in for quite a period.

I think the shopping centers will be seeing vacancies that will be hard to fill. I think that the retailers will be struggling in many cases. And of course, the supply of real estate doesn’t go away.

So, that could be… the shopping center business, which was selling at, you know, these premiere cap rates of 5 percent or even less sometimes. I think that is going to look very silly
before all of this is done. In fact, it already is looking that way. So I wouldn’t count… I wouldn’t…

The service businesses are generally the better businesses. They require less capital and they can be more specialized in the markets they serve, in general.

But I would not look for any quick rebound in the retail manufacturing service businesses. We’ve got a ways to go on that.

And we’ve got a ways to go on the ones that are construction related. But at least there, you can sort of see the math of when it’ll work out. And you can get a lot of information on what’s going on in real estate markets.

South Florida, I think, will be… for example, I think that’s going to be a problem for a long, long time.

I hope it isn’t. But I just think the math of it is pretty devastating, in terms of the number of units you have and net household formation down there. You’ve got a lot to wade through.


Charlie Munger:

I’ve got nothing to add.

Warren Buffett:


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