Working for Warren

Berkshire Hathaway annual meetings are unlike any other. For one thing, how many company annual general meetings (AGMs) attract 30,000-plus people? Jim Weber, CEO of Brooks Sports, a Seattle-based, high-end running shoe maker and a Berkshire Hathaway company since 2006, reckoned such an event would be a great selling opportunity and sold product right on the 2012 expo floor. Having good success, Weber sent Warren Buffett a note: ”We sold x number of shoes; thanks for the opportunity. We talked to a lot of shareholders, had a lot of fun and we learned a lot. I think we can do more next year.” Buffett sent a note back, saying, “That’s great; everybody loves Brooks. If you’re ever in Omaha, come by; we’ll go have a steak.”

Weber soon found himself in Omaha, where he took Buffett up on his offer—and talked him through Brooks’ strategy. “I knew he’d love Brooks,” Weber recalls. “We have high returns on capital, we’re very profitable, we’re growing double-digit, we have a brand, we understand what our competitive strengths are and we are stoking the fire on being who we are. We’re not chasing any other brand.”

“Buffett acquires well-run, growth businesses and never sells.”

Buffett did indeed fall in love with the company. Six months later, he called Weber to say, “You guys are doing some interesting, unique things and we’re going to spin you out of Fruit of the Loom [Brooks’ parent company at the time]; we will set you up as a standalone subsidiary of Berkshire Hathaway, and you’ll report to me.”

The sage of Omaha’s conglomerate owns or has a controlling interest in a bewildering array of businesses, from Acme Brick and car insurer GEICO to over-the-road trailer-rental company Xtra. People marvel at how he and sidekick Charlie Munger keep track of the menagerie of 53 companies. The short-hand answer is that Buffett acquires well-run, growth businesses and never sells. He gives his individual enterprise CEOs a long leash but a tight cultural tie that binds them to the Berkshire Way. In 2001, Brooks had an epiphany in which it decided it could not sustain growth in the athletic shoe business if it was going to chase the volume price points and go up against major players such as Nike and Asics. The company, which did about $60 million in revenue at the time, exited about $15 million of that business by abdicating the cheap-shoe sector in favor of higher-end, highly engineered products retailing between $90 to $160. Today, it has annual revenues just under $480 million.

“We were 8th or 9th or worse at everything we were playing at,” recalls Weber. “We were a very small brand in a very large category, and we were overspent by our competitors in every space, from R&D to marketing.” The firm concentrated on what it did best—running shoes. No lifestyle or family shoes. It treated the product with the same technical-performance focus that manufacturers of ski boots practice.

“Everybody has a relationship with their shoe, and so the shoe is a pretty important piece of equipment, even if you’re just running two or three days a week,” Weber says. Fifty million people say they run for fitness and an even greater number say they walk for the same reason. The athletic-footwear market is estimated globally at $8 billion. The average runner has 2.6 pairs of running shoes. Over 80 percent of Brooks’ business is running shoes; the rest is athletic apparel. Due to high growth in its U.S. market, the domestic vs. non-U.S. split in its business is 50-50.

In the interview to follow, Weber discusses the future prospects of being a premium player in this huge, global arena, as well as his experiences as a Berkshire Hathaway portfolio CEO.

What is truly different about your product to command a price premium?
Our product line is created from a biomechanical point of view. Some people need a little bit more stability. Most people like more cushioning. Some people don’t; they like to be more minimalist and [to] be totally in tune with the road with a super-flexible shoe. But there’s a whole range of what people need. If everyone could run on the same shoe comfortably, mile after mile, the top brand in this category might have 100 percent market share. But people’s needs differ.

“He listens to our strategy, he has seen us as we’ve worked through our business plans and he challenges us to stay a premium brand.”

It sounds simple, but the foot is a very complicated part of your body. Everyone’s running gait is different. Most people run on asphalt. It’s a repetitive motion, so the shoe can really matter in terms of comfort when you’re running; think about knee pain and other things. So people have a sense that they need the right shoes.

How has the operational performance of the company changed since Brooks went to a higher price point, technical-performance end of the market?
We added 16 points to growth margin, and we did that in the first five years of the strategy. We don’t sell on price; we sell on performance. And what I’m most proud of is that growth is all in our best products, selling through the best retailers at full margin. We haven’t chased any sales. We’ve really created brand demand for premium-priced products in a very competitive market with players bigger than ourselves.

Can you point to some technology that you offer that others do not have?
Yeah, I’ll give you one example. The engine and drive train of a shoe is the midsole. That’s where everything happens. It’s basically the cushioning system. When you think about a running shoe, it’s got to dampen and absorb shock as you
land; then, it’s got to transition to the forefoot. But it needs to be firm as you push off. You propel off your toes, essentially.

For four years, we worked to create—at the molecular level—a material, we call DNA. We’ve engineered 40 formulations on this [item] with leading chemical companies [like Mitsui]. It’s our proprietary technology. In fact, we just got a patent approved on this DNA system. It’s a non-linear, non-Newtonian material, like cornstarch, that cushions a stride due to the give in the material. When a runner lands with two to three times one’s body weight, it allows the runner to transition to toe-off because the shoe rebounds before the runner hits his or her next stride. It’s in every shoe we make, and it’s our secret sauce. You feel it when you run. Most running shoes are made in China. What would it take for you to re-shore some manufacturing in the U.S.?

We’re thinking and working on some things that’ll allow that to happen. There’s so much labor in our running shoes right now. There’s still a lot of stitching in the upper, and there’s a lot of componentry in the way we build product. We’re making progress going to technologies like no-sew: it’s essentially glued pieces instead of stitching, and there’s a lot less labor in it. Unfortunately, the U.S. no longer has the skilled labor in handwork and sewing. But I think that in the next five years, it’s not unlikely that we could see some shoes being made in America—but not sooner than the next two or three years.

How often do you talk with Buffett, and does this generally result in a material change to the business?
He has one required meeting a year, and that’s really around the year-end review on compensation. I don’t get to set my own compensation. That’s all he requires, and, then, it’s more “whenever you need me.” I will send him a report. It’ll show up on a Monday morning at 10 a.m., and I’ll get a response back by 2 p.m. He’s always available. I had a call with him two days ago.

Here’s where he’s impacted us: he listens to our strategy, he has seen us as we’ve worked through our business plans and he challenges us to stay a premium brand. What does “premium” mean in running? We’ve created a brand that runners are falling [in] love with. They’re paying full price for our products; we’re not a discount brand. We used to be. I mean, we once sold $30 shoes. But we lost money at it. He’s seen what we’ve created. He challenges us not to chase opportunity that takes us away from what “premium” means. He’d rather have a smaller, highly profitable, highly defendable and special business than a big one. That’s exactly how he’s described it to me.

You don’t have quarterly reports or annual budgets?
He doesn’t want a budget from me. Oh, I send him quarterly reports and he reads them, but he doesn’t ask a lot of questions because I think he’s got a lot of confidence in the way we think about the business and the way we’re executing it. We’ve earned his support, but that’s my responsibility. Prior to our being owned by Berkshire Hathaway, we had a private equity owner.

“He doesn’t ask a lot of questions because I think he’s got a lot of confidence in the way we think about the business and the way we’re executing it.”

One of the things I learned is that if you have opportunities and you know where you’re going and you’re executing it, you don’t get sold; you attract an investor. If you’re a company with issues, and you’re not really on it, you get sold and the agenda’s going to change. So as a CEO, I [feel] my job is to create a vision for this company, a plan to execute against it, and I own that. I have to get approval and support for it. If I don’t have approval and support, I don’t get to play that plan.

Do any of Buffett’s lieutenants get involved with what you’re doing?
Absolutely. But they only have 24 people at corporate, right? The internal audit folks do, and obviously we’ve got policies and the like, so the internal-audit side is engaged. Both Todd Combs and Ted Weschler, two of Warren’s investment guys, are runners. They’re not involved with Brooks, but they love to hear our story, and we’ve got them testing some of our shoes. Then, we’ve hosted other folks [who] have come through Seattle, such as Tracy Britt, his financial analyst/assistant, who’s very involved with a lot of the companies. There’s no structure at Berkshire to kind of manage, police and birddog companies. They don’t do that. They expect the CEOs and the leadership teams to do that. It’s really unique. Doesn’t he ask his CEOs to name their successors? Yeah, you have to send him a hit-by-the-bus letter every December. You have to lay out the succession plan if you’re not there tomorrow and send it to him personally. Where will you take the business? Will it be a Berkshire business indefinitely, or are there other plans?

In Warren’s owner’s manual, which he published along with his annual letter years ago, (but is now published separately as “The Berkshire Hathaway Shareholder’s Owner’s Manual”), there’s an item in there that basically says this may affect our returns, but you all need to know that we will never sell a business.

They don’t sell businesses, ever. It’s Berkshire Hathaway’s business model to acquire, in many cases, family businesses, which have to sell because of estate planning issues. But they want to continue to run the business, and drive the culture because they enjoy it. That’s why Berkshire is the acquirer of choice for many sellers. It’s unique in that regard. Warren creates trust because he doesn’t look over people’s shoulders. What things are likely to raise red flags in Buffett’s mind?

Completely shifting your strategy in a direction that he doesn’t have confidence in. If we went down-market to pump sales and to try to grow into places that, ultimately, weren’t all that smart for the brand or long-term profitability, I would expect he wouldn’t be happy.

Really? No minimum thresholds like operating margin, EBITDA or market share, etc.?
What impresses me about him is his breadth of knowledge. He’s got everything from insurance and ice cream to building products, running shoes and railroads—all over the world. He has incredible bandwidth to look at good businesses in a wide degree of categories. I’ve never seen him say, “Hey, these guys are doing this; you oughta try that.” In fact, there’s a story I heard where he sees all the furniture retail companies meeting together and jokes, “What are you guys doing? You better not be working on synergies. I bought three good businesses, and I don’t want to have just one.”

He once said that he’s painting a painting; and if the shareholders looked over his shoulder and told him he needs a little more blue or red, he wouldn’t like that. He wants to paint his painting. He thinks CEOs want to do that too. I think he believes that you [have] got to let people run their own show because, if you don’t, they won’t stay at Berkshire. And he believes he’s got better talent because he gives full autonomy.

J.P. Donlon: J.P. Donlon is Editor Emeritus of Chief Executive magazine.