What Turned Warren Buffett Into a Car Guy? Economics

Warren Buffett has always said he likes industries that come with moats, so-called barriers to entry that keep competitors at bay. In buying a chain of car dealerships, Buffett’s Berkshire Hathaway sees plenty of moats and a clear path to consolidation.

With its acquisition (pdf) of Van Tuyl Group, the largest privately held chain of auto dealerships, Berkshire will add auto sales and service to its planes (NetJets) and trains (Burlington Northern). The field is highly fragmented, with the 10 largest U.S. dealers accounting for less than 10 percent of new vehicle sales, according to Morningstar. That gives Berkshire plenty of opportunity to buy other dealers and help concentrate the industry, giving it cost and pricing advantages. The deal also presents a natural complement for Berkshire’s Geico insurance unit, which could let Van Tuyl’s dealers sell auto insurance when people buy a car—“a key policy shopping juncture,” in the words of Keefe Bruyette & Woods analyst Meyer Shields. Allstate is testing a similar program with some dealers, according to Morningstar.