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Berkshire Hathaway’s Strategy for McLane

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Acquisition

Berkshire Hathaway (BRK-B) acquired McLane from Walmart (WMT) for $1.45 billion in 2003. It’s the company’s single-largest non-insurance business.

McLane operates a wholesale distribution business that provides grocery and non-food products to retailers, convenience stores, and restaurants. The company also operates as a wholesale distributor of distilled spirits, wine, and beer. Its clientele include Walmart, 7-Eleven and Yum! Brands.

McLane’s is a high-volume and low-margin business. In 2012, it acquired the Meadowbrook Meat Company—a large foodservice distributor for national restaurant chains.

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Client concentration

McLane’s business can be severely affected if any of its major clients decide to source their products through some other avenue.

The company reported revenues of $46.6 billion, up by 1.5% in 2014 over the previous year. Food-service and beverage revenues reported most of the increase. The company’s overall pretax earnings declined by 10.5% to $51 million in 2014 mainly due to higher per unit processing costs and higher food-service operating costs.

Berkshire will have to purchase businesses that can add more value to McLane’s wholesale distribution model. Currently, profitability is low compared to what the company earns on its other subsidiaries.

Berkshire competes to acquire related assets. Some of its competitors include managers like Blackstone (BX), BlackRock (BLK), Goldman Sachs (GS) and Morgan Stanley (MS). Together these companies make up 5.93% of the Financial Select Sector SPDR Fund (XLF). Berkshire and its competitors are also part of the iShares Core S&P 500 ETF (IVV).

Berkshire also faces competition in the wholesale distribution sector from private companies such as Pine State Trading, Consumer Product Distributors, and Bellboy Corporation.

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