Over the past four and a half decades, See's Candies has been an integral part of Warren Buffett (Trades, Portfolio)'s business empire. This business, which Buffett acquired for $25 million, has generated (by Buffett's estimate) more than $1 billion of value over the years for Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) shareholders, making it possibly one of the greatest investments of all time.
Today, Berkshire does not break out See's profits. But back in the late '70s and '80s, See's formed part of Blue Chip Stamps, which was managed by Charlie Munger (Trades, Portfolio). Munger gave a detailed description of the See's business in his annual reports, so I wanted to go back and take a look at some of this commentary to try and establish what Buffett and team saw in the company at the time.
There's a full archive of Munger's Blue Chip letters here.
Charlie Munger (Trades, Portfolio) on See's Candies
"See's aggregate sales in pounds held up well last year, being essentially unchanged from the previous year even though prices were increased at a rate which turned out to be somewhat higher than the inflation rate. Shop sales increased, but only because of the impact of additional stores. Shops operating throughout both years registered an aggregate decrease in poundage of 1.6%. Christmas season quantity order sales to businesses declined for the first time since the1974 recession. Ingredient costs in 1981 increased only moderately and, with revenues up about 15%, See's profits rose sharply to an all-time record." -- Charlie Munger (Trades, Portfolio), Blue Chip Stamps 1982 annual report
It seems that it was immediately apparent to Buffett and Munger that See's was a good business. The business appears to have outperformed expectations in both profitability, and growth immediately:
"See's is by far the finest business we have ever purchased, exceeding our expectations, which were quite conservative. Our record as foretellers of the future is often poor, even with respect to businesses we have owned for many years, and we so greatly underestimated See's future that we were lucky to acquire it at all." -- Charlie Munger (Trades, Portfolio), Blue Chip Stamps 1982 annual report
Like most other companies, Berkshire went on to acquire, See's original management was kept in place at the business when it was taken over. Chief executive, Chuck Huggins had spent most of his working life at the business, so knew it inside out. Keeping this highly experienced, successful manager in place, was undoubtedly part of the group's success.
See's brand was and continues to be its biggest strength. The reputation of the brand allowed it to continue to raise prices ahead of inflation and increase profits without having profits fall:
"Boxed chocolate consumption per capita in the United States continues to be essentially static, and the candy-store business remains subject to extraordinary cost pressures, offset to some extent in 1981 by subnormal increases in ingredient costs. When See's increases prices each year to reflect cost pressures, it never knows whether consumer resistance will cause net profits to fall instead of rise. Thus far, consumers have been willing to keep buying in the amounts required to keep See's profits rising irregularly at an average rate which, aided by large recent gains, has turned out to be quite satisfactory." -- Charlie Munger (Trades, Portfolio), Blue Chip Stamps 1982 annual report."
Munger's report went on to note:
"We believe that See's exceptional profits occur, despite all the problems, mainly because of both new and old customers prefer the taste and texture of See's candy, as well as the extremely high level of retailing service which characterizes its distribution. This customer enthusiasm is caused by a virtually fanatic insistence on expensive natural candy ingredients plus expensive manufacturing and distributing methods that ensure rigorous quality control and cheerful retail service. These qualities are rewarded by extraordinary sales per square foot in the stores, frequently two to three times those of competitors, and by a strong preference by gift recipients for See's chocolates, even when measured against much more expensive brands." -- -- Charlie Munger (Trades, Portfolio), Blue Chip Stamps 1982 annual report.
This a fascinating example of not only a highly successful business, but of the sort of high-quality businesses Buffett and Munger like to buy. See's has been so successful because it has always maintained its level of service and quality.
Despite rising prices, customers have been happy to come back year after year to buy because they know what they will get.
Buffett and Munger have not changed the business since they brought it. Where other managers might have been tempted to change the recipe to increase margins, aggressively expand or aggressively borrow, See's has carried on as a cash cow, generating funds to be reinvested across the Berkshire empire. This focus on cash generation is, in itself, exciting.
Buffett is really interested only in cash. Unlike other business managers, he's not willing to spend heavily on expansion to drive growth. Cash generation is vital and this is something See's has been able to provide reliably for many years. It does not look as if this cash cow is going to fail anytime soon.
Disclosure: The author owns shares in Berkshire Hathaway.
