In 1966, when investors Charlie Munger and Warren Buffett bought Baltimore’s Hochschild Kohn department store, the news dutifully appeared on the financial page of The Baltimore Sun. The names Buffett and Munger were largely unknown.
Buffett had just bought Berkshire Hathaway the year before. He was 35 when he acquired Hochschild’s and was just on his way to becoming one of the richest men in the world.
He and his partner, on the advice of one of his New York friends related to the family that owned Hochschild Kohn & Co., purchased the store that sat on the corner of Howard and Lexington streets. Along with the deal went the busy suburban branches at Govans-Belvedere Square, Edmondson Village, Eastpoint and Harundale. They believed they were getting a thriving business at a fair, perhaps bargain, price.
Baltimore bankers thought Buffett was overpaying at $12 million. They were right.
In a few years, Munger and Buffett soured on their decision. They never lost money outright, but what little they did take away was eroded by inflation. Buffett listed the buy as one of his “mistakes” in investing.
Lexington and Howard
A new book, “Buffett’s Early Investment,” by author Brett Gardner, carefully examines the transaction and its financial implications. It also sheds light on Baltimore in the 1960s and, among other realities, the city’s continuing population drop.
Gardner, who studied the transaction, feels it was not an egregious error.
“Taking a step back and thinking through Hochschild’s likely future should have been enough for them to pass on the retailer,” Gardner writes. “Buying a company whose primary economic driver faced three remarkably similar competitors on the same block in a no-growth market was a recipe for poor financial performance.”
The three competitors were Hutzler’s, Stewart’s and Hecht’s, all of which had strong buying constituencies. This quartet created a selling force only a few steps apart. When Baltimoreans rhapsodize about the old stores downtown, mixed in with movie theaters and restaurants, this is that combination.
At the time, we were a walking or public transit city. Shoppers took buses and cabs downtown and often sent big buys home via a delivery service. If you bought a toaster at Hochschild’s, you might have had a crab cake at nearby Lexington Market — and you went home happy.
Buffett wasted no time selling Hochschild’s to a group called Supermarkets General, and it didn’t take long for the store to begin declining at an alarming clip. The downtown store closed in 1977 and was the first of the Big Four stores to pack it in at Howard and Lexington. Hochschild’s suburban stores also disappeared.
“The downtown department stores had a deep emotional connection to their communities. Hochschild Kohn’s Toy Town parade was a staple of the Baltimore Christmas season. People even cried when neighboring Hutzler’s closed its doors. But all these stores shut down; the emotional attachments simply did not translate into sustainably attractive economics,” Gardner writes.
What did Buffett learn from Hochschild Kohn?
“Buffett’s primary mistake with Hochschild Kohn was buying into a business with no sustainable competitive advantage at a ‘kind of cheap’ price,” Gardner writes. “Hochschild Kohn’s outlook clouded once this geographic advantage of being close to the streetcars. Buffett said he thought he was buying a second-tier department store at a third-class price, which was a foolish needle to try to thread.”
“Retailing is like shooting at a moving target,” Buffett said of the experience. “In the past, people didn’t like to go excessive distances from the streetcars to buy things. People would flock to those retailers that were nearby.”
He also said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
His partner, Charlie Munger, perhaps said it best: “Buying Hochschild Kohn was like the story of a man who buys a yacht. The two happy days are the day he buys it and the day he sells it.”