Buffett: Customer Loyalty Cannot Be Rewritten with a Smile
Warren Buffett, at 21, partnered with his National Guard friend Jim Schaeffer to buy a Sinclair gas station. Not far across the street was a Texaco station, which consistently had better business.
Buffett and his brother-in-law Truman Wood helped out at the station every weekend. They smiled while washing windshields and did what they could to attract new customers. Although Buffett disliked manual labor, he still got involved. Drivers continued to go to the Texaco across the street.
Buffett recalled that the Texaco owner was successful and well-liked, winning over them every month. He realized the power of customer loyalty: the Texaco could keep operating because of its regular customers, while he could not change this situation.
This venture resulted in a $2,000 loss for him. He called it one of the dumbest things he had ever done, as it was a significant amount of money at the time and his first real loss. Both gas stations sold the same type of gasoline, were in close proximity, and the service efforts did not attract the loyal customers from across the street.
The difference in the books was not in the posted gas prices but in which station the drivers chose to enter. The Sinclair invested partnership funds, weekend labor, and windshield washing, while the Texaco already had the loyalty of its customers. The new station did not capture this repeat business.
This was a flow of existing customers, not new demand. Drivers continued to pay their gas money to the well-liked Texaco owner, while Sinclair only received transient customers without a fixed destination. The $2,000 loss remained in the partnership venture. The beneficiaries were the incumbents with loyal customers; the newcomers trying to divert traffic with smiles and extra service were under pressure.
Source: Public Information
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Buffett made this deal around 1951 in Omaha, having already taken Benjamin Graham's course at Columbia University, still operating under the framework of finding cheap assets. The gas station pulled him from a paper loss to a situation where customers refused to switch stores. He later bought See's Candies, not at liquidation prices, but based on customer-designated brands that maintained repeat purchases despite annual price increases; in 1988, he built a position in Coca-Cola, relying on the same habitual purchasing on shelves, not on the refining or bottling assets themselves.
The $2,000 bought him a negative outcome: when there is a well-liked owner next to a homogeneous product, weekend labor and windshield washing do not create switching costs. Money went into the storefront, inventory, and labor, but not into a customer list. The Texaco owner did not need new equipment, just the existing drivers to return next month. The loss made him realize that "can operate forever" had to be substantiated by the number of loyal customers.
This parallels how See's can retain gift customers despite supermarket private labels and how Coca-Cola maintains its share through designated purchases even when not favored in blind tests. The gas station was in the elimination phase of his personal investments: commodity retail had no reason to leave, and later positions concentrated on brands and insurance with exit costs.
Structurally, this is a transfer of pricing power. Gas prices are determined by neighboring stations and wholesale prices, while the choice of which station to enter is determined by whether the owner is liked. New stores can change service actions but cannot alter established repeat routes. Customer loyalty shifted pricing power from the cost of fuel to the station that drivers were unwilling to switch from.
ABAB News · Law of Cognition
- Next to homogeneous products, smiles do not bring loyal customers.
- The first loss usually buys switching costs.
- Incumbents sell habits, while new stores can only sell cheap.