Scott Fetzer Companies
Company Overview
Scott Fetzer Companies is a diversified manufacturing holding company acquired by Berkshire in 1986 for approximately $315 million — over the objections of a competing leveraged buyout bid. CEO Ralph Schey ran Scott Fetzer for Berkshire until 2000, generating extraordinary returns on a very small capital base. Buffett used Scott Fetzer repeatedly as his primary teaching example for 'owner earnings' and high-return business models.
Investment Story
1985–1986: Competitive acquisition. A leveraged buyout of Scott Fetzer had been announced — the company's management had arranged a deal. Buffett wrote directly to Scott Fetzer's board, offering a higher price than the LBO without the leverage, and the board accepted. The acquisition closed in January 1986 for $315 million.
Ralph Schey's tenure. Schey ran Scott Fetzer for Berkshire for 14 years, generating cumulative pre-tax earnings of approximately $1.03 billion on a purchase price of $315 million — more than 3x the acquisition cost returned in profits within 14 years, while the businesses themselves remained intact and growing.
Portfolio of businesses. Scott Fetzer's most famous subsidiaries are World Book Encyclopedia (door-to-door education sales) and Kirby vacuum cleaners (in-home demonstration sales). Beyond these, Scott Fetzer operated over a dozen industrial businesses manufacturing air compressors, paint sprayers, electrical components, and other products.
The owner earnings demonstration. Buffett used Scott Fetzer's annual results in Berkshire letters for years as the clearest real-world illustration of owner earnings: the combination of minimal maintenance capital requirements, strong pricing power in specialty markets, and outstanding management created returns on capital that regularly exceeded 100% annually. These extraordinary returns demonstrated that capital-light business models with pricing power were genuinely superior to their asset-heavy counterparts.
Buffett's Own Words
Fetzer Right after yearend we acquired The Scott & Fetzer Company (“Scott Fetzer”) of Cleveland for about $320 million. (In addition, about $90 million of pre-existing Scott Fetzer debt remains in place.) In the next section of this report I describe the sort of businesses that we wish to buy for Berkshire. Scott Fetzer is a prototype - understandable, large, well-managed, a good earner. The company has sales of about $700 million derived from 17 businesses, many leaders in their fields. Return on inves
*We have added four new lines of business because of the Scott Fetzer and Fechheimer acquisitions. In the case of Scott Fetzer, the two major units acquired were World Book and Kirby, and each is presented separately. Fourteen other businesses of Scott Fetzer are aggregated in Scott Fetzer - Diversified Manufacturing. SF Financial Group, a credit company holding both World Book and Kirby receivables, is included in "Other." This year, because Berkshire is so much larger, we also have eliminated separate reporting *
Buffalo News, Fechheimer, Kirby, Nebraska Furniture Mart, Scott Fetzer Manufacturing Group, See's Candies, and World Book. In 1987, these seven business units had combined operating earnings before interest and taxes of $180 million. By itself, this figure says nothing about economic performance. To evaluate that, we must know how much total capital - debt and equity - was needed to produce these earnings. Debt plays an insignificant role at our seven units: Their net interest expense in 1987 was only $2 mil
In the past, Mutual Savings and Loan, and Scott Fetzer Financial (a credit company that primarily finances installment sales of World Book and Kirby products) were consolidated on a “one-line” basis. That meant we (1) showed our equity in their combined net worths as a single- entry asset on Berkshire’s consolidated balance sheet and (2) included our equity in their combined annual earnings as a single-line income entry in our consolidated statement of earnings. Now the rules require that we consolidate each asse
Nebraska Furniture Mart ... 17,070 18,439 8,441 9,099 Scott Fetzer Manufacturing Group .... 33,165 28,542 19,996 17,640 See's Candies ............. 34,235 32,473 20,626 19,671 Wesco - other than Insurance 13,008 16,133 9,810 10,650 World Book ................ 25,583 27,890 16,372 18,021 Amortization of Goodwill .. (3,387) (2,806) (3,372) (2,806) Other Purchase-Price Accounting Charges ......
Investment Lessons
Owner earnings, not accounting earnings, measure true business performance. Scott Fetzer consistently reported modest GAAP earnings because depreciation charges reduced reported income — but the actual maintenance capital required was a fraction of the depreciation taken. Real owner earnings, which Buffett calculated using actual maintenance capex rather than accounting depreciation, demonstrated returns on equity that were extraordinary by any standard.
Niche market dominance creates excellent economics. World Book's door-to-door sales methodology and Kirby's in-home demonstration model both served specific niches where the sales process itself created the product experience. These niches — home education, premium cleaning equipment — could be dominated by single high-quality brands because the direct sales model inherently limited the number of viable competitors. Niche domination through specific distribution advantages is a real and durable competitive position.