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Rupert Hargreaves
Rupert Hargreaves
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Why See's Candies Changed Buffett's Investment Style for Good

See's Candies was more than just a candy store

May 22, 2020 | About:

See's Candies is a cornerstone of the Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) empire.

When Warren Buffett (Trades, Portfolio) first sealed the deal to buy the company for $25 million in 1972, it had roughly $30 million in sales and brought in $4.2 million in profit. Since then, the business has produced more than $2 billion in income for Berkshire.

Cash cow

Interestingly, since the deal was completed, See's hasn't been much of a growth engine for Berkshire. According to the most recent figures we have, the firm earned $90 million of income in 2014. That suggests a compound annual growth rate of 7.6% in income between the acquisition and 2014.

Adjusted for inflation, See's growth rate is even less impressive. A profit of $4.2 million would have been $24 million in 2014 dollars. That gives an after-inflation growth rate of 3.2% per annum.

However, Buffett got something much more than a growing business with the See's deal. Berkshire acquired a cash machine that would continue to produce a steady, predictable stream of cash for decades, which Buffett could then invest how he saw fit. The Oracle of Omaha explained this principle at the 2014 Berkshire annual meeting of shareholders:

"See's has done remarkably well, far better than any chocolate company in the country... we can't do much about increasing the size of the market. And we've tried a lot of ways. And we've tried moving out of our strong geography, multiple times. I mean, Charlie and I looked at what we were earning in California in the '70s and said to ourselves, "If we could do this in 50 states instead of one, you know, we'll get very rich." So we tried it and we didn't get very rich. It doesn't travel that well."
...
"And we've done very, very, very well in See's. And it not only has provided us with earnings that we've used to buy other businesses, so we've added lots of earnings power through See's, beyond the earning power we've added at See's."

In 2019, Buffett estimated that the business had provided Berkshire with as much as $2 billion worth of capital to invest. That's not bad for a $24 million outlay.

A different type of business

According to the CEO of Berkshire, buying See's also opened up his eyes to the power of brands and branding. This resulted in the acquisition of Coca-Cola (NYSE:KO) stock a decade-and-a-half later. As Buffett explained in 2014:

"We made a lot of money in Coca-Cola partly because we bought See's, or at least in my case, bought See's, because I'd understood brands to some degree, but there's nothing like owning one, and sort of seeing the possibilities with it as well as the limitations, to educate yourself about things you might do in the future. And in 1972, we bought See's. And in 1988 we bought Coca-Cola. And I wouldn't be at all surprised, if we had not owned See's, whether we would've owned Coca-Cola later on."

So, while See's was a relatively small acquisition and has not generated much in the way of growth for the Berkshire group over the past few decades, the company is one of the most important parts of the Buffett story. Without the cash flows provided by the business, it is likely that the group's growth wouldn't have been as fast as it was in the 1970s and 1980s.

See's provided capital for Buffett how to invest in attractive opportunities during the 1970s bear market. What's more, the deal helped drive his transaction away from buying deep value stocks, towards buying high-quality businesses at a reasonable pricethe type of companies that dominate his portfolio today.

Disclosure: The author owns shares in Berkshire Hathaway.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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