Clarity in DiamondsBy Mel Duvall | Posted 2003-08-01 Print
Shareholders nearly deify Warren Buffett for the way he manages his diverse holding company, Berkshire Hathaway of Omaha.
Clarity in Diamonds
Buffett's management style is plain in his interactions with Borsheim's Fine Jewelry, a warehouse-sized store near Omaha that Buffett bought on not much more than a whim in 1988. An apocryphal story is that Buffett walked into the store during the Christmas season to buy a ring and while there, a salesman called out to owner Ike Friedman, "Don't sell Warren the ring, sell him the store!"
Early in the new year Buffett called Friedman to ask if he was interested in selling. According to a retelling of the meeting in a book by Robert Miles, The Warren Buffett CEO: Secrets from Berkshire Hathaway Managers (John Wiley & Sons, 2003), Buffett asked Friedman five questions: "What are sales? What are gross profits? What are expenses? What's in inventory? Are you willing to stay on?" Based on the answers, Buffett and Friedman shook hands on a deal the same day with no further examination.
Buffett later boasted in a letter to shareholders that Borsheim's was bought without an audit, contradicting a most basic rule of corporate governance. He also says Borsheim's performance has exceeded his expectations. A purchase price has never been disclosed.
Susan Jacques is now CEO of Borsheim's, having started with the company as a $4-an-hour salesperson in 1983. While she agrees Buffett gives her free reign to run the store, she also says he keeps in close contact, sometimes talking to her by phone several times a week during the holiday season. Every January, Buffett gives her a letter with two or three things he wants her to focus on in the coming year, such as increasing sales of a product line like watches or improving Borsheim's already low expense-to-sales ratio, which Jacques says is 20% of sales.
Other jewelry retailers spend 50% of sales on expenses. But Borsheim's operates only one store, a 50,000-square -foot glittering showcase, and sells its necklaces and rings at bulk discount to other stores. Jacques and Buffett won't disclose Borsheim's sales figures, although executives are proud to say only Tiffany's on Fifth Avenue in New York sells more. That store has annual sales of about $200 million.
Borsheim Chief Financial Officer Erin Limas doubles as chief technology officer, responsible for accounting systems, point-of-sale systems and Internet sales.
The company is frugal with technology, Limas says. In 1998, when deciding what e-commerce software to use, Limas did the first thing that came to mind: She called Microsoft Chairman Bill Gates. And he called back.
Buffett and Gates are friends; it was Gates who convinced Buffett to start using a personal computer so the two could play bridge over the Internet. Limas says she spent "no more than $50,000" on Microsoft's Site Server 3 Commerce Edition Web software.
Until 2001, Borsheim's had no electronic sales terminals or even cash registers on the sales floor. All sales were written up on paper slips then brought to a back room where up to six clerks would punch figures into a retail sales application from Application Systems Corp. (ASC), a Boston firm that makes software for the jewelry industry.
James Porte, president of the Jewelry Marketing Institute, an industry association, says Borsheim's, and the jewelry industry as a whole, has been slow to adopt technology. As a result, they have missed out on cost savings and the ability to capture personal information about their customers.
Limas finally brought Borsheim's into the modern world by purchasing 25 wireless laptop computers from Dell for the sales floor. Jacques went wireless so salespeople could follow customers around as they shopped and because she didn't want to lose any counter space to machines. She also wanted a unit with a keyboard so Borsheim's could record the kind of personal information about clients, such as birthdays and anniversaries, which Porte says fosters loyalty.
The laptops now feed sales information directly into the ASC software and the information is backed up on a Hewlett-Packard AlphaServer. The data entry positions were cut, saving about $60,000 a year, although the clerks were redeployed elsewhere at the store. Borsheim's uses accounting software from Great Plains, which Microsoft bought in December 2000.
While financials could be electronically sent to or accessed from Berkshire Hathaway's head office, they aren't. Instead, Limas has the data printed and delivered to headquarters, a few miles across town. Limas also compiles weekly sales reports to fax to Buffett. From Thanksgiving through Christmas, she faxes updates every day.
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