Dexter Shoe
Company Overview
Dexter Shoe was a Maine-based manufacturer of premium, American-made leather footwear, producing approximately 7.5 million pairs annually from factories in Maine and Missouri. Berkshire acquired Dexter in 1993. Buffett has subsequently called this 'the worst deal I've made' — and specifically the worst because of two compounded errors: overestimating competitive durability and paying entirely in Berkshire stock.
Investment Story
1993: The acquisition. Berkshire acquired Dexter Shoe Company for approximately $433 million in Berkshire stock — roughly 25,203 shares of Berkshire Class A, valued at $433 million at the time of the deal. Dexter was producing 7.5 million pairs of quality American-made shoes annually and appeared to have a durable position in the premium footwear market.
The competitive thesis. Buffett believed that American-made quality shoes commanded a genuine premium and that Dexter's brand and manufacturing quality would allow it to compete effectively against lower-cost producers. The company had an excellent record of profitability and appeared to operate in a stable niche.
1994–2001: The thesis collapse. Dexter's competitive position eroded rapidly as imported footwear — produced at dramatically lower labor costs in Asia and South America — systematically undercut domestic producers even in the quality segment. American consumers proved largely indifferent to the domestic-vs-imported distinction when price gaps were large. Dexter's volumes declined and margins compressed.
2001: Writing down the investment. By 2001, Berkshire wrote down its Dexter investment to essentially zero. The business had been restructured and substantially reduced in scope.
The compounded mistake. The Dexter acquisition cost Berkshire approximately $433 million worth of Berkshire stock in 1993. Those same Berkshire shares, if never used in the Dexter acquisition, would have been worth approximately $6-7 billion by 2022. The 'real' cost of the Dexter mistake — paying in subsequently-appreciated Berkshire stock — is measured in billions, not hundreds of millions.
Buffett's Own Words
Here managers frequently have trouble putting themselves in the shoes of their shareholder-owners. With this schizoid approach, the CEO of a multi-divisional company will instruct Subsidiary A, whose earnings on incremental capital may be expected to average 5%, to distribute all available earnings in order that they may be invested in Subsidiary B, whose earnings on incremental capital are expected to be 15%. The CEO’s business school oath will allow no lesser behavior. But if his own long-term record with
Now let’s get back - at long last - to our three businesses: At Nebraska Furniture Mart our basic strength is an exceptionally low-cost operation that allows the business to regularly offer customers the best values available in home furnishings. NFM is the largest store of its kind in the country. Although the already-depressed farm economy worsened considerably in 1985, the store easily set a new sales record. I also am happy to report that NFM’s Chairman, Rose Blumkin (the legendary “Mr
See’s candy, 1,635 pairs of Dexter shoes, 1,150 sets of Quikut knives and 3,104 Berkshire shirts and hats. Additionally, $26,944 of World Book products were purchased as well as more than 2,000 golf balls with the Berkshire Hathaway logo. Charlie and I are pleased but not satisfied with these numbers and confidently predict new records in all categories this year. Our 1999 apparel line will be unveiled at the meeting, so please defer your designer purchases until you view our collection. Dairy Queen will also be
See's candy, 1,143 pairs of Dexter shoes, $29,000 of World Books and related publications, and 700 sets of knives manufactured by our Quikut subsidiary. Additionally, many shareholders made inquiries about GEICO auto policies. If you would like to investigate possible insurance savings, bring your present policy to the meeting. We estimate that about 40% of our shareholders can save money by insuring with us. (We'd like to say 100%, but the insurance business doesn't work that way: Because insure
See’s candy, 1,635 pairs of Dexter shoes, 1,150 sets of Quikut knives and 3,104 Berkshire shirts and hats. Additionally, $26,944 of World Book products were purchased as well as more than 2,000 golf balls with the Berkshire Hathaway logo. Charlie and I are pleased but not satisfied with these numbers and confidently predict new records in all categories this year. Our 1999 apparel line will be unveiled at the meeting, so please defer your designer purchases until you view our collection. Dairy Queen will also be
Investment Lessons
Competitive position assessment must stress-test global labor arbitrage. Dexter's American manufacturing looked like a moat (quality, craftsmanship, brand identity) but was actually a cost disadvantage masquerading as quality differentiation. When overseas producers achieved comparable quality at 40-60% lower costs, American consumers made clear that the 'Made in America' premium was insufficient to justify the price gap. Any domestic manufacturer competing against global low-cost producers must honestly assess whether its quality premium can sustainably justify the full cost differential.
Stock as acquisition currency multiplies mistakes. Paying Berkshire stock — which Buffett believed was approximately fairly valued — for a business that subsequently proved worthless created compounded capital destruction. The buyer gives away something (Berkshire stock) that continues to appreciate relative to an acquisition (Dexter shoe) that declines to zero. The effective cost of the stock given up grows every year; the value of the business received falls every year. This asymmetry is why Buffett now treats Berkshire stock as precious acquisition currency.
Even sophisticated investors fail at competitive durability analysis. Dexter was not an obvious mistake at the time of acquisition. The company had an excellent track record, an apparently loyal customer base, and management Buffett respected deeply. The error was a specific analytical failure — underestimating how quickly global manufacturing could match quality standards that previously required American labor. This failure (not incompetence, but wrong analysis about a specific competitive question) illustrates that investment errors are often subtly wrong analyses, not obviously bad decisions.