Could Origin USA Succeed Where Berkshire Hathaway Failed?
Jocko Willink is a retired Navy SEAL who has become popular through his excellent podcast. He is also an author and businessman. By listening to some of his podcasts, I heard about a business that he co-owns called Origin USA. Origin is a clothing manufacturer from Maine that started making Jiu Jitsu gear before expanding into boots, jeans, and other products. The founder of the company got his hands on an old loom in an abandoned factory in New England, and started weaving fabric.
Despite having an admirable mission, I was pretty skeptical of the business idea when I first heard about Origin. I wondered if an idealistic vision was blinding the company to the brutally competitive realities in its industry. In my book, Capital Allocation, I wrote about the difficulties Warren Buffett and Berkshire Hathaway faced manufacturing textiles in the US. Buffett took over Berkshire in 1965, and struggled operating the textile business for 20 years before having to shut it down. If Warren Buffett couldn’t succeed in that line of work, who could? Luckily for shareholders, Berkshire is still a thriving business today because Buffett was able to take capital out of the textile business and put it to work in other businesses with brighter futures.
The original Berkshire Hathaway has some similarities to Origin. After thinking about the company further, I realized that there are some key differences to Origin’s business that give it a chance to be a success story. Before comparing and contrasting Berkshire with Origin, watch the video below for a background on the situation. If listening to Jocko doesn’t get your energy level up, then I don’t know what to tell you.
Berkshire Hathaway was headquartered in New England, just like Origin. The New England area in the US was a major textile manufacturing center for a number of years. Berkshire made the lining that went on the inside of men’s suits. In Berkshire’s case, they made a commodity product. There was no brand or differentiating aspect to what Berkshire manufactured. Since it was a commodity product, the low cost operator would win. In the 1950’s, Japanese workers were paid less than $0.15 per hour, while the minimum wage in the U.S. at the time was $1.00 per hour. Japanese firms had a cost advantage in terms of labor, and this was too much for Berkshire to overcome. Eventually, textile manufacturing in the US basically became extinct. These are the ruins that Origin emerged from in New England.
The situation at Berkshire’s textile mill looked rough, but there are some key differences with Origin though. Berkshire just made one piece of a suit - the lining. They didn’t create the whole product. Other parts of the suit probably came from outside the US. Even for the most patriotic customers, I doubt much excitement would get stirred up from buying a suit that had just its inside lining created in America. Origin, on the other hand, manufactures a complete product that is made in the US. The raw materials are sourced from America as well. The message of ‘Made in America’ will be more successful when an entire boot is created in the US, as opposed to when just the laces are made there.
Berkshire sold to customers like the retailing giant Sears Roebuck. Discount retailers like Sears were laser focused on providing the lowest costs to its shoppers. Berkshire couldn’t compete on price, since it couldn’t match the operating costs of its Japanese competitors. In the present day, it is much easier to sell directly to the consumer thanks to the internet. There are less gatekeepers and intermediaries. A company like Origin can reach a niche customer base early on, allowing for the opportunity to put its product to the test in the marketplace.
Since Berkshire couldn’t compete on price, the company would need its customers to pay more for its products. Without a valuable brand or differentiated product, customers just weren’t going to pay higher prices to Berkshire. Origin, on the other hand, has developed a brand name. The internet has helped smaller brands spread to a wider audience, and Jocko’s platform helped the company gain recognition. The Jocko Podcast has 1.62 million subscribers on Youtube, and I’m sure plenty of people also listen on Spotify or other platforms. Origin’s message that they ensure all materials, fibers, and components are sourced in America has built up its unique brand as well. Even though these products were manufactured in the US in the past, Origin has a first-mover advantage in the present day in terms of making those products completely in America.
Origin has to charge more for its products due its cost structure. There is precedent for this potentially working out though. Coffee beans are a commodity, yet Starbucks is able to take that commodity and sell it for a premium. Plenty of premium fashion brands have existed around the world as well. Brunello Cucinelli, for example, is a luxury fashion brand that markets the Italian craftsmanship behind its clothing. If Origin can develop a brand known for quality - or ‘soul’ as Jocko puts it - then it has a chance at achieving a premium price point.
Origin is a private company, so I don’t have any financial data on the business. Their organization appears to be thriving in terms of sales though. With a high quality brand, maybe they will be able to earn attractive returns on capital despite the difficulties that similar firms have had in the past. Operations definitely have to be efficient in this line of work though. Execution far outweighs the quality of the business idea.
I have no issue with products being made in foreign countries. Trade between countries can be very beneficial. It is admirable though for a country and for its citizens to strive to be self sufficient - or at least less dependent on the kindness of others. The beautiful thing about capitalism is that each person is able to help shape what happens. Everyone gets a vote. People might get nostalgic about the old local main street department store, but customers decided to put them out of business by spending their money at Walmart instead. If enough individuals demand expensive electric vehicles, then companies will innovate and create that product. During the 1900’s, manufacturing left America and went overseas as consumers decided to buy cheaper products made in other countries. There wasn’t a major push for ‘Made in America’, or else businesses like the Berkshire textile mill would have been able to charge a high enough price to remain in business. It is difficult to predict if this will change over time, but there seems to be a revival in demand for American manufacturing. The supply chain difficulties we experienced over the last few years might have stimulated more demand for manufacturing capabilities in the US. Now more than ever, it seems like an interesting time to test out a business plan like Origin USA.