Berkshire Hathaway 2013 Annual Meeting Audience Question # 48

Why Benjamin Moore continue to adhere to a dealer system

Warren Buffett:

Jonathan.

Jonathan Brandt:

I have a question about the competitive landscape in the paint business.

I personally always use Benjamin Moore, but some say that Benjamin Moore is disadvantaged because it doesn’t control its own distribution, as does Sherwin-Williams, and they note that it has lost market share to Behr, which is sold in the home centers at lower prices.

You recently replaced management there. What changes in strategy and/or pricing, if any, are being undertaken at that unit, and what is the outlook for that franchise?

Warren Buffett:

Yeah. Benjamin Moore, it’s a relatively small percentage of the total paint industry, but it… at the high end, it is the best regarded paint, and we have not lost position in that respect.

But the… when we purchased Benjamin Moore, I made a promise. I even made a video. It had a dealer system, and people that invested their savings and passed on from generation to generation dealerships from Benjamin Moore, and counted on the company adhering to a dealer system, even though you could always get a huge jump in volume, particularly in the first year, if you went with the big boxes.

So we were always approached by the big boxes, and they said, you know, “Let us take Benjamin Moore into our stores,” whether it be Home Depot or whomever. And we would’ve gotten a big jump in volume when that happened and they would’ve loved us… to have us… as a brand with that kind of identity in their stores, but it would’ve represented a total change in the distribution arrangement.

I don’t think it would’ve worked out as well over time, and I know it would have been essentially… particularly after my pledge, which the other… which the management pledged too, they would’ve been double-crossing a network of dealers that trusted us, and trusted us when we bought it to continue with the policy.

A dealer policy will work with a first-class brand like Benjamin Moore. It will never get the kind of market share as will take a Behr, which is distributed through Home Depot.

We were actually offered Behr at one time. Charlie, do you remember that one?

Charlie Munger:

Yes, I do.

Warren Buffett:

Yeah, yeah. But the company was actually investigating, and went on its way to implementing, some moves that would’ve, in effect, gutted, or we felt would drastically hurt the dealers and violate the pledge that I’d made to them back when we bought it.

So we did have a change there. And we will… we will not follow the Sherwin-Williams path, which is a very… I mean, it’s a very effective business strategy. I’m not knocking that at all, but
that is not our strategy. Our strategy will be a dealer strategy, focused on the high end of the market.

Charlie Munger:

Besides, it’s worked very well.

Warren Buffett:

Oh, yeah, it’s worked well, and it’ll continue to work well.

It doesn’t mean that Sherwin-Williams won’t do extremely well. I think they will. It doesn’t mean that Behr won’t do well. I think they will.

But we are in a different segment and it’s up to us to protect and really foster the dealer distribution network, and I think we can have something, and do have something, very special with those dealers and with the position that Benjamin Moore has.

But it will not lead to far higher market shares or anything. I think it will lead… and it has… to very decent profitability. Benjamin Moore is a good business, and I think it will continue to be a good business.

Charlie?

Charlie Munger:

Well, I agree totally. I always wish we could buy five more like it tomorrow.

Warren Buffett:

Yeah, exactly.

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