Textile Business
Berkshire Hathaway's origin as a New Bedford, Massachusetts textile manufacturer, which Buffett acquired in 1965 and slowly wound down over two decades.
Concept Analysis
Definition & Origins
The textile business is where Berkshire Hathaway began — and where Buffett learned, at great cost and over twenty years, what a structurally bad business does to capital, to judgment, and to the people who run it. The company itself was born of decline: in 1955 Berkshire Fine Spinning and Hathaway Manufacturing, two venerable New England textile makers, merged in hopes that combination would restore strength. It did not. In the nine years following the merger, the company's net worth fell from $51.4 million to $22.1 million, and aggregate sales of $530 million produced an aggregate loss of $10 million. Profits appeared from time to time, but the net effect was always one step forward, two steps back.
This was the company Buffett Partnership bought control of in 1965. The purchase was a classic cigar-butt: the stock sold well below the $19.46 per share of book value, and that book value — all of it textile assets — itself considerably overstated intrinsic value, because the assets could not earn anything close to an appropriate rate of return. Buffett knew the business was unpromising when he bought. The lesson of the next two decades was not analytical; it was about how hard it is to act on what you already know when loyal employees, able managers, and a town's payroll are attached to the losing operation.
The story matters because it is the negative template for everything Berkshire later became. Insurance, See's Candies, the Buffalo News, Coca-Cola — each was in some way the textile lesson inverted: buy the business whose economics improve with time, not the one whose economics grind down every dollar reinvested in it.
Core Ideas
Commodity economics are structurally hostile to investor returns. Textiles sold an undifferentiated product into a world market with substantial excess capacity. Much of the competition — first southern non-union mills, then foreign producers whose workers earned a small fraction of the U.S. minimum wage — held a cost advantage no amount of managerial effort could close. Buffett's 1985 verdict was that when a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.
Capital investment cannot rescue a commodity business; it only deepens the trap. Every proposed textile equipment purchase looked like a winner on standard return-on-investment tests — often better than comparable spending at See's or the Buffalo News. But competitors made the same investments, and once enough of them did, the reduced costs became the baseline for reduced prices industrywide. After each round of investment, all the players had more money in the game and returns remained anemic.
Good management is necessary and nowhere near sufficient. Ken Chace and his successor Garry Morrison were, in Buffett's words, excellent managers — every bit the equal of those running Berkshire's profitable businesses. They reworked product lines, machinery configurations, and distribution. It changed nothing about the outcome. A manager's record, Buffett concluded, is far more a function of which business boat you get into than of how effectively you row.
Opportunity cost is the real loss. The 1967 decision to fund the National Indemnity purchase with cash pulled from the textile operation was the one decisively right textile-related capital decision of the era. Every subsequent dollar reinvested in looms instead of insurance or equities compounded the original mistake. The correct frame was never "is this mill earning something" but "what would this capital earn anywhere else."
Practical Application
The Burlington test. Before investing in any capital-intensive commodity business, run the Burlington Industries experiment. Burlington was by far the largest U.S. textile company in 1964, with $1.2 billion in sales against Berkshire's $50 million, superior distribution and production, and a far better earnings record. It committed to textiles and spent roughly $3 billion on capital expenditures over the next 21 years — more than $200 per share on a $60 stock, much of it rationally aimed at cost improvement. The result: lower real sales, far lower returns on sales and equity, and a share price (split-adjusted) barely above its 1964 level while the CPI more than tripled. Twenty years of intelligent capital allocation inside a bad industry produced a devastating outcome for shareholders. The conclusion generalizes: the industry's economics will beat the management's brilliance almost every time.
The to-invest-or-not dilemma has no good answer inside the business. Buffett described the miserable choice: huge capital investment would keep the textile business alive at terrible returns on ever-growing capital, and foreign labor-cost advantages would remain regardless; refusing to invest made the mills increasingly non-competitive even against domestic rivals. When both branches of the decision tree are losing ones, the correct move is to leave the tree — which is what the chronically-leaking-boat principle (see Own Words) says.
Book value and replacement value can be mirages. The 1986 auction of the textile machinery is the cleanest illustration in all the letters. Equipment occupying 750,000 square feet, originally costing about $13 million (including $2 million spent as late as 1980–84) and replaceable new for perhaps $30–50 million, carried a book value of $866,000 — and sold for gross proceeds of $163,122. Looms bought for $5,000 apiece in 1981 found no takers at $50 and went for scrap at $26 each, less than removal costs. Assets are worth what they can earn, not what they cost.
Apply the lesson in reverse. See's Candies is the textile story inverted: a business with pricing power and minimal capital needs, bought in 1972, that compounded for decades. The analytical gain from textiles was a permanent preference for businesses where reinvestment is optional, not mandatory for survival.
Common Misconceptions
Misconception 1: The mistake was buying Berkshire in 1965. The purchase price was cheap enough to work even so; the costly error was persistence — two decades of reinvestment and of declining to exit, driven by loyalty to employees and community and by hope that conditions would improve. Buffett is explicit that he should be faulted for not quitting sooner, and that 250 other mill owners closed since 1980 with no information he lacked; they simply processed it more objectively.
Misconception 2: Labor or management killed the textile business. Buffett absolved both. The workers were, by industry standards, poorly paid; union leaders were sensitive to the company's cost disadvantage and did not push unrealistic demands; even during liquidation the workforce performed superbly. Ken Chace was an outstanding manager. The cause was structural: commodity product, excess world capacity, and competitors with a fraction of U.S. labor costs.
Misconception 3: Commodity businesses are always uninvestable. The failure condition is commodity competition without a durable cost advantage. GEICO's direct distribution is a structural cost edge that competition cannot easily replicate; Berkshire's textile mills had no equivalent. The textile lesson is not "avoid commodities" but avoid commodity businesses whose only defense is good management.
Buffett's Own Words
In particular, Ken Chace’s efforts after the change in corporate control took place in 1965 generated capital from the textile division needed to finance the acquisition and expansion of our profitable insurance operation.
One of the lessons your management has learned - and, unfortunately, sometimes re-learned - is the importance of being in businesses where tailwinds prevail rather than headwinds.
Basically, we have worked with the capital with which we started. From our textile base we, or our Blue Chip and Wesco subsidiaries, have acquired total ownership of thirteen businesses through negotiated purchases from private owners for cash, and have started six others.
All of that book value consisted of textile assets that could not earn, on average, anything close to an appropriate rate of return. In the terms of our analogy, the investment in textile assets resembled investment in a largely-wasted education.
In July we decided to close our textile operation, and by yearend this unpleasant job was largely completed. The history of this business is instructive.
I won’t close down businesses of sub-normal profitability merely to add a fraction of a point to our corporate rate of return. However, I also feel it inappropriate for even an exceptionally profitable company to fund an operation once it appears to have unending losses in prospect. Adam Smith would disagree with my first proposition, and Karl Marx would disagree with my second; the middle ground is the only position that leaves me comfortable.
Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
The dumbest thing I could have done was to pursue “opportunities” to improve and expand the existing textile operation -- so for years that’s exactly what I did. And then, in a final burst of brilliance, I went out and bought another textile company. Aaaaaaargh!
Thought Evolution
Related Concepts
Case Companies
The case study: twenty years of competent management and recurring reinvestment in a commodity business with structurally hostile economics, ending in liquidation in 1985
The controlled experiment: the industry's largest, best-run player spent $3 billion over 21 years and still destroyed most of its shareholders' purchasing power
The counterpoint: capital deployed into brand economics with pricing power compounded for decades, demonstrating everything the textile economics could not
The extension: a later repetition of the pattern, where a strong regional brand proved insufficient against structural cost competition from abroad