What Does the Oracle of Omaha Know About Walmart That We Don’t?

What Does the Oracle of Omaha Know About Walmart That We Don’t?

By Brent Franson | Industry Insights | 19 February, 2017

Early this week, Berkshire Hathaway sold off nearly $1 billion of its investment in Walmart Stores.

Why sell the bulk of its stock in Walmart? What does Warren Buffett know that we don’t? The answer to that last question, by the way, is obviously more than you and I could ever hope to know as outsiders looking in. That’s why this massive stock sale gives us some very good takeaways that can help us understand what’s coming for retailers like Walmart, which continue to struggle with adapting to the new retail paradigm.

Walmart’s sun is setting – and Buffett knows it.

At $483B in revenue, Walmart is the largest company in the world. So what gives? Why offload the stock? In short, revenue doesn’t matter as much in the market as growth – and that is an area where the giant is undeniably weak. In retail these days, growth is coming from ecommerce and mastering the art of omni-channel. In other words, retailers who are currently winning in the marketplace are those that signal clear savvy in using both online and offline channels to deliver value to customers and returns to shareholders.

Think about it: when you want to buy something online, what’s the first site you visit? Ten to one, it’s not Walmart.com with online revenue that’s just 3 percent of its total revenue. It’s Amazon. It’s because Amazon is the ecommerce category-definer – and as the company starts to branch out with physical stores, there’s every expectation it will capture significant share of consumer dollars spent there as well. Buffett described the Amazon effect the best when he said retailers “have not figured the way to either participate in it, or to counter it.” Walmart has not cracked the code and it’s too far behind to get there quickly enough. Walmart’s moat – differentiators that prevent competitors from storming the castle – is drying up.

Walmart’s doing the right thing but it doesn’t matter.

Wall Street values and rewards empire-builders. They want Caesar at the height of his power, expanding the reach of Rome. But Walmart is more like a weakened Caesar, stabbed in the back by Brutus. It unfortunately operated with a similar strategic playbook to Macy’s – and like Macy’s, it’s paying a hefty price for misreading the tea leaves. Both retailers went against personalization at a time when people really want and value that aspect of shopping. They opened up as many stores as they could. They put into place centralized purchasing and distribution systems that made it harder to deliver quickly.

Now, of course, Walmart will need to close stores over the next few years, invest more into its online business and making Jet.com work, and play a game of serious catch-up. Those are all the right moves for Walmart to make, by the way, to salvage its competitiveness. But they are huge smoke signals to the market that say these are backfooted steps meant to make up lost ground. They’re not seizing new territory or conquering competitors – and the stock price will reflect that second-place status.

This is not a dismissal of an entire market category.

Retail is still valuable and it’s alarmist – and likely a gross oversimplification – to use this stock sale to suggest that Warren Buffett doesn’t believe in retail as a category. That’s a reductionist viewpoint which doesn’t give him enough credit – or the industry its due as a major economic force. It is fair to say that Buffett doesn’t believe in Walmart anymore. It’s fair to say that he’s probably a pragmatist who buys undervalued stock with the potential to grow at a pace that generates favorable returns – and sells when they’re no longer poised to deliver.

So you might infer that Walmart is either overvalued or perfectly valued – in which case, it’s no longer interesting or lucrative for Buffett. But fears that the retail category itself is no longer one to believe in are seriously overblown. At more than $24T, retail is doing just fine. That said, retail is at an inflection point where retailers must adapt to reflect the reality of the modern shopper’s expectations – and those that are more like Amazon, and less like Walmart, will do much better.

See the full article as well as other posts by Brent here.

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Brent Franson

Brent Franson

Brent is the CEO of Euclid Analytics.

More posts by Brent Franson