One of the most outstanding case studies there is of a good business, in my opinion, is See's Candy. I realize there are plenty of other companies out there that might fall into this bracket, and other investors might have different examples. Still, I like this company for several reasons, which are relatively unique to the candy business. Investors can learn a lot from its success.
For a start, the company has had a long life. Most small businesses which have similar qualities to See's are either never really talked about, fall out of style at some point or get swallowed up by a larger competitor and never discussed again. But with See's, ever since it has been part of Warren Buffett (Trades, Portfolio)'s empire when it was acquired 1972, we have received periodic updates on its performance. Due to its association with the Oracle of Omaha, we also know far more about this company that we do about the acquisitions of other conglomerates.
Because Buffett's Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) is very transparent about the companies it owns, we get to see first-hand the competitive advantages of the candy maker. See's has a strong customer base, which has build brand popularity and allowed it to increase prices every year. The company could have messed around with its recipe to reduce costs and fund international expansion, but it hasn't. This has kept consumers loyal and competitors at bay.
Then there's the capital allocation strategy Buffett has adopted as an owner of See's. Buffett realized early on that this was an exceptional business. It had its own base of customers, and these were loyal shoppers. He also understood that countless other companies have ended up overstretching themselves and losing their core customer base when expanding too fast. So, Buffett has avoided making this mistake. Rather than trying to push See's to be something it is not, he's sat back, let management do what it does best and collected the income from the business to better allocate elsewhere.
The See's strategy
In Janet Lowe's book "Damn Right, Behind the Scenes With Berkshire Hathaway Billionaire Charlie Munger," the author devoted a whole chapter to the See's deal. The book also looked at the management of the company after the deal, including the following comments from Buffett himself:
"We've tried 50 different ways to put money into See's... If we knew a way to put additional money into See's and produce a returns a quarter of what we're getting out of the existing business, we would do it in a second. We love it. We play around with different ideas, but we don't know how to do it."
The book went on to highlight comments from Munger about businesses with similar qualities to those exhibited by See's:
"Munger told Berkshire shareholders that there are a large number of businesses in America that throw off lots of cash, but which cannot be expanded very much. To try and expand would be throwing money down a rat hole, he said. Such businesses don't stir acquisition desires in most corporations, but they are welcome at Berkshire because he and Buffett can take the capital and invest it profitably elsewhere."
This is the strategy that Berkshire has used so well for so many years. See's was the perfect starter business for a portfolio built around this model.
Unfortunately, there are not many public businesses that have the same model. Public companies are usually under pressure to drive sales growth, which can mean spending money chasing growth at any cost. However, there are a couple of examples in the Berkshire Hathaway portfolio today. Companies like American Express (AXP), Bank of America (BAC), Apple (AAPL), and Coca-Cola (KO) all have a history of returning excess capital to investors rather than chasing and unprofitable growth.
Buffett has said that the See's deal helped him focus on this investing style. That's why I believe it's one of the best case studies for investors today.
Disclosure: The author owns no share mentioned.
Read more here:
- How Buying See's Candy Changed Warren Buffett's Style
- Why Warren Buffett's Blue Chip Stamps Deal Was so Revolutionary
- A Look at One of Warren Buffett's Greatest Mistakes
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