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
Berkshire Hathaway's origin as a New Bedford, Massachusetts textile manufacturer provides some of Buffett's most honest and important lessons about capital allocation errors, commodity business economics, and the moral complexity of closing businesses that employ loyal workers. The textile operations ran from Berkshire's founding until 1985 — a 20-year period during which Buffett gradually recognized but delayed accepting that the business was economically unviable.
Core Ideas
Commodity economics are structurally hostile to investor returns. Textile manufacturing in New England in the 1960s faced an unavoidable economic reality: the product (fabric) was undifferentiated, pricing was set by the lowest-cost producer (Southern states, then overseas manufacturers), and every efficiency improvement was competed away in lower prices to customers. Even exceptional management — and Ken Chace genuinely was exceptional — could not overcome a structural cost disadvantage of 20-30%.
Opportunity cost accumulates silently. Every dollar invested in new textile equipment from 1965 to 1985 produced returns significantly below Berkshire's alternatives (insurance, equities, acquisitions). These dollars, had they been deployed elsewhere, would have compounded at far higher rates. The cumulative opportunity cost over 20 years was enormous — probably measured in billions of dollars relative to what Berkshire could have been worth if earlier exit had freed that capital.
Good management cannot overcome bad economics indefinitely. 'When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.' Every year from 1965 to 1985, Buffett could observe this principle in practice: smart, dedicated management, terrible economics, poor returns on capital.
Practical Application
The parallel to the textile experience — lessons applied in the opposite direction — was See's Candies. Instead of pouring capital into a business with bad economics (no pricing power, commodity competition), Buffett invested in a business with extraordinary economics (brand pricing power, minimal capital requirements, loyal customers). Every year of See's compounding reinforced what every year of textiles lost: capital in businesses with durable advantages vs. capital in businesses without them.
Common Misconceptions
Misconception 1: The textile mistake was primarily analytical. Buffett knew Berkshire textiles were economically challenged from his earliest analyses. The error was sentimental persistence — continuing to fund a business that employed loyal workers in a town with few alternatives, long after the investment case had become untenable.
Misconception 2: Commodity businesses always fail. Commodity businesses with structural cost leadership — GEICO's direct model, Walmart's logistics scale — can generate excellent long-term returns. The failure condition is commodity competition without cost advantage, not commodity competition per se.
Buffett's Own Words
*Textile operations came in well below forecast, while the results of the Illinois National Bank as well as the operating earnings attributable to our equity interest in Blue Chip Stamps were about as anticipated. However, insurance operations, led again by the truly outstanding results of Phil Liesche’s managerial group at National Indemnity Company, were even better than our optimistic expectations. Most companies define “record” earnings as a new high in earnings per *
In some of these your ownership is 100% but, in those businesses which are owned by Blue Chip but fully consolidated, your ownership as a Berkshire shareholder is only 58%. (Ownership by others of the balance of these businesses is accounted for by the large minority interest item on the liability side of the Balance Sheet.) Such a grouping of Balance Sheet and Earnings it
*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. (It’s worth a mention that those who have sold to us have, almost without exception, treated us with exceptional honor and fairness, both at the time of sale and subsequently.) But before we drown in *
Berkshire-Waumbec Textiles (508) 1,723 (508) 1,723 202 848 Associated Retail Stores .. 2,440 2,775 2,440 2,775 1,169 1,280 See’s Candies ............. 15,031 12,785 8,958 7,598 4,212 3,448 Buffalo Evening News ...... (2,805) (4,617) (1,672) (2,744) (816) (1,333) Blue Chip Stamps - Parent 7,699 2,397 4,588 1,425 3,060 1,624 Illinois National Bank .... 5,3
*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. Now, however, our intrinsic business value considerably exceeds book value. There are two major reasons: (1) Standard accounting principles require that common stocks held by our insurance subsidiaries be stated *
Thought Evolution
Related Concepts
Case Companies
The case study: 20 years of declining returns in a structurally challenged commodity business
The counterpoint: capital deployed in brand economics generates compounding returns the textiles never could
The extension: another case of apparent regional brand advantage proving insufficient against structural cost competition