Warren Buffett's favorite encyclopedia became his 'most difficult problem.' Here's the story of World Book.
AP Photo/Nati Harnik
AP Photo/Nati Harnik
- One of Warren Buffett's favorite businesses became his "most difficult problem" less than a decade after he bought it.
- The Berkshire Hathaway CEO acquired World Book in 1986, trumpeting its market dominance, positive ratings, competitive pricing, and his personal connection to its encyclopedias.
- However, online learning tools and digital encyclopedias such as Microsoft's Encarta soon decimated the business.
- "Berkshire's most difficult problem is World Book," Buffett told investors in 1996. "It is not the business it was five years ago."
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One of Warren Buffett's favorite businesses became his "most difficult problem" less than a decade after he bought it.
The billionaire investor and Berkshire Hathaway CEO acquired World Book, a print publisher of encyclopedias, as part of Scott Fetzer in 1986. "It sells more sets in the US than its four biggest competitors combined,"Buffett told shareholders in his annual letter, adding that its competitive pricing and positive ratings made it a quality purchase.
Another draw was the personal connection to its flagship product felt by Buffett and his partner, Charlie Munger.
"Charlie and I have a particular interest in the World Book operation because we regard its encyclopedia as something special," Buffett wrote. "I've been a fan (and user) for 25 years, and now have grandchildren consulting the sets just as my children did."
Buffett trumpeted World Book's success over the next few years. Its encyclopedia sales surged 45% between 1982 and 1986, he said in his 1986 letter, adding that its books are "extraordinarily well-edited and priced" and "a bargain for youngster and adult alike."
A year later, Buffett touted the "most dramatically revised edition since 1962" with 10,000 more color photos, 6,000 revised articles, and 840 new contributors. He included World Book in Berkshire's "Sainted Seven" businesses along with See's Candies and Nebraska Furniture Mart in his 1988 letter, and counted it in a "divine assemblage" of companies in his 1989 letter.
However, World Book's success proved shortlived. Its annual pre-tax earnings peaked at about $32 million in 1990, seesawed for a few years, then plunged below $9 million in 1995 - two years after Microsoft launched Encarta, its digital encyclopedia.
"Berkshire's most difficult problem is World Book, which operates in an industry beset by increasingly tough competition from CD-ROM and on-line offerings," Buffett said in his 1995 letter. "Our sales and earnings trends have gone in the wrong direction."
The so-called Oracle of Omaha remained hopeful for a comeback as World Book slashed overheads, revamped its distribution, and invested in electronic offerings. However, unit volumes fell again in 1996 and the publisher "did not find it easy," Buffett told his shareholders.
"It is not the business it was five years ago," Buffett said at Berkshire's annual meeting in 1996. "And I don't think it will be the business that it was five years ago, because the world is changed in some ways on that."
Encyclopedias even fell out of favor at Berkshire's annual shareholder meetings. Sales of World Books and related products at the event slumped from around $75,000 in 1997 to a little over $16,000 in 1999.
World Book might be Buffett's "quickest mistake" ever, Daniel Pecaut told ThinkAdvisor last year. The investment boss of Pecaut & Co, who has attended Berkshire's yearly meeting for more than three decades, said Encarta and other digital rivals "just destroyed the business."