Last month in Berkshire Hathaway’s SEC Form 13F filing, Warren Buffett revealed that in Q4 2016 he had sold $900 million worth of Walmart stock—or 90% of the Walmart stock Berkshire owned. This leaves Buffett and Berkshire Hathaway with about $100 million of Walmart stock, down from $3 billion in the middle of 2016.
So why did Warren Buffett choose to completely cash out of the largest retailer in the world?
WHY BUFFETT SOLD OUT OF WALMART
The timing of Warren Buffett’s decision to exit his Walmart investment—right after Trump’s election—raised the possibility that maybe the proposed border adjustment tax had something to do with it. But Buffett—who has warned that it’s a mistake to make investment decisions based on politics—said that the border adjustment tax wasn’t why.
The real reason Buffett decided to sell almost all of Berkshire’s Walmart stock was that he thinks retailing is just too hard of a business to be in. And its a hard business to be in that’s been made even tougher by the rise of online shopping and Amazon.
Here’s Buffett talking about his sale of Walmart in detail during hisrecent interview on CNBC’s Squawk Box:”Walmart’s a fabulous company. And what Sam Walton and his successors did, I mean, that’s one of the great stories of American business.
I think retailing is too tough for me. We bought a department store in 1966 and I got my head handed to me. I’ve been in various things in retail. I bought Tesco over in the U.K. and got my head handed to me. Retailing is very tough.
And I think the online thing is very hard to figure out, you know? Now, we’re sitting in a retailer [the Nebraska Furniture Mart, the largest home furnishing store in North America which Buffett bought in 1983] we own that does very well. I mean, I think this particular business is relatively immune from the online business, although we do a lot of online business here. But this does very well. I think it’ll continue to do well.
But I think that Amazon in particular is an entity that’s gonna have everybody in their sites. And they’ve got delighted customers. And it’s extraordinary what they’ve accomplished. And a lot of people the delivery, you know, and that is a tough, tough, tough, competitive force. Now, Walmart’s pushing forward online themselves and they’ve got all kinds of strengths. But I just decided that I’d look for a little easier game.”
At last year’s Berkshire Hathaway Annual Shareholder’s Meeting, Buffett said that Amazon “is a big, big force and it has already disrupted plenty of people and it will disrupt more,” adding that many companies “have not figured the way to either participate in it, or to counter it.”
WALMART’S HEADWINDS… AND THE RISE OF AMAZON
Buffett first started investing in Walmart 12 years ago in 2005. Walmart’s stock has risen about 50% since then, which – when including dividends – translates into a 7% annual return. But recently Walmart’s stock has faltered.
Although not as dramatic as the declines seen in other traditional retailers like Macy’s, Sears, JCPenney, and even Target, Walmart has not been immune to the rise of e-commerce – and of Amazon. Since the end of 2014, Walmart shares have fallen 21%, compared with a jump of 119% in Amazon.
In 2012, former Walmart CEO Mike Duke said that his biggest regret as CEO was not investing more in e-commerce to better compete with Amazon.”I wish we had moved faster. We’ve proven ourselves to be successful in many areas, and I simply wonder why we didn’t move more quickly. This is especially true for e-commerce. Right now we’re making tremendous progress, and the business is moving, but we should have moved faster to expand this area.”
While Walmart has invested billions in e-commerce since then, including its $3 billion acquisition of Jet.com, the company holds a tiny share of the online market compared with Amazon.
Walmart’s online sales were $14 billion in 2015, compared with Amazon’s $107 billion. That being said, Walmart is still ahead in overall sales with $482 billion, more than four times as much as Amazon’s revenue.
WHAT BUFFETT THINKS OF AMAZON’S JEFF BEZOS
Much of Amazon’s success in disrupting the entire retail industry can be attributed to its founder and CEO, Jeff Bezos. During Buffett’srecent interview on CNBC’s Squawk Box, Becky Quick said that a major investor had recently told her – off the record – that he or she had heard Buffett say that Amazon’s founder Jeff Bezos was “probably the best manager [Buffett’s] ever seen.”
Buffett confirmed this:I think maybe he is, yeah. You know, I’ve said that. I mean it’s remarkable. Here’s a guy who gets in a car with his wife leaves Shawand starts driving across and he thinks, ‘How am I gonna take over the world? Maybe I’ll sell books online.’ He is one terrific businessperson.”
So why doesn’t Buffett own shares of Amazon?”Well, that’s a good question. But I don’t have a good answer. Obviously, I should’ve bought it long ago because I admired it long ago, but I didn’t understand the power of the model. And the price always seemed to more than reflect the power of the model at that time. So it’s one I missed big time.”
Becky Quick then asked if it’s too late for Buffett to buy Amazon stock because it’s already had its run:
I just don’t know. Retailing is tough for me to figure out. I mean, if you go back to when I was a kid, in every town, the guy that owned the big department store was king, whether it was Marshall Field or Dayton or Hudson in Detroit or Frederick and Nelson in Seattle, or you name it – the department store was king.
And people said, “What can happen to it?” You know, it’s down there where the streetcar lines crossed and the women took the streetcar to shop there. And they could see 500 spools of thread and 500 wedding dresses. And they couldn’t see anything like that. It offered this incredible array of goods.
And then somebody came along with a shopping center. And instead of making it vertical with all this display owned by one person, they spread it out, owned by many.
And now comes the internet, and that’s the ultimate variety of things that you can get to very easily. So people love variety. They love low prices and a whole bunch of things. So it just keeps evolving. And the great department stores, many of ’em have disappeared and the rest are under pressure.”
One more interesting fact about Warren Buffett and Jeff Bezos: Jeff Bezos owns the Washington Post, which he acquired in 2013. When Warren Buffett was a kid, he made more than $175 a month as a newspaper boy delivering Washington Post newspapers… that’s the equivalent of $2,360 per month today. And in 1973, Buffett began buying up the stock of The Washington Post company and soon become one of its largest investors and served on its Board of Directors. Through this investment he became good friends with Katherine Graham, who controlled The Washington Post Company and was the matriarch of the Graham family, who owned the newspaper from 1933 until they sold it to Bezos in 2013.