See’s Candies Case Study Prepared by John Chew via CSInvesting
This case is compiled from various sources and, though repetitive, there are important lessons in this case. This case along with Buffett’s “Inflation” Article is critical for your understanding. This purchase was the big shift in approach for Buffett because he left behind his focus of “cigar-butt” investing (buying below asset or liquidating value) and moved into franchise investing. He bought companies whose main value would be earned in the future (See’s, Coke, Gillette, etc.).
Describe the competitive advantages of See’s Candies. Could this be a faster growing business if See’s sold though other marketing channels? How does Buffett analyze this business? What price did Buffett pay and why?
Short background on See’s Candies
(Source: The Warren Buffett CEO: Secrets from the Berkshire Hathaway Managers by Robert P. Miles (2002)
See’s Candies is particularly interesting because of both the business and the operating managers. Mr. Huggins was not part of the founding family and didn’t participate directly in the ownership of the company. Therefore, he could well serve as a model of what Berkshire management will be like 50 years from today.
See’s Candies is often described by Warren Buffett as the perfect business. It was one of the first wholly owned businesses purchased by Berkshire and was the first investment for which vice chairman Charlie Munger influenced Buffett to pay a premium for quality. It was the first multigenerational family-owned business to be added to the Berkshire family of businesses. It was also the first Berkshire-owned consumer franchise with a built-in ability to raise prices from 50 cents a pound during the 1929 stock market crash to $12 per pound today (2002). Without the See’s Candies purchase, there may not have been a major investment in Coca-Cola 20 years later. With superior management, sustainable competitive advantages, scarcity of close substitutes, ability to raise prices without losing customers, high profits, low capital investment, and extraordinary returns on capital, it’s the perfect business for any student of business, management, and investment.
See’s Candiesfulfills all the criteria Buffett looks for. The business is profitable and has no debt. It has a solid franchise brand name and is a multigenerational family business that maintains uncompromising business values. A long-term management team is in place, and the company is able to grow without any additional influx of capital. Critical to See’s Candies’ success has been the management by Chuck Huggins.
Factors behind success:
Offering greater insight into the investment process and management tenets of Chuck Huggins, Buffett wrote, “See’s has a one-of-a-kind product ‘personality’ produced by a combination of its candy’s delicious taste and moderate price, the company’s total control of the distribution process, and the exceptional service provided by store employees. Chuck rightfully measures his success by the satisfaction of our customers, and his attitude permeates the organization. Few major retailing companies have been able to sustain such a customer-oriented spirit, and we owe Chuck a great deal for keeping it alive and well at See’s Candies.
The secret to investment success is a durable competitive advantage based on a franchise. The motivation that causes a consumer to buy and consume chocolate was the same 50 years ago and will be the same 50 years from now. (Human habit and psychology).
Two management tenets that Huggins insisted on early to ensure See’s Candies survived when other retail candy stores failed:
1. Concentrate the efforts of all employees in all departments to attain ever-increasing excellence in customer services and product quality.
2. Never compromise quality ingredients or quality service over profits.
See’s Candies Teaches a Lesson from Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger (2000).
See’s Candies—with its motto “quality without compromise” –represents more to Munger than an after-dinner delicacy. The acquisition of See’s Candies was among the earliest deals that he and Warren Buffett did together and it was one of the first companies they purchased outright. But most important, the experience of See’s Candies taught Charlie and Warren a lesson that caused a major improvement to their investment style.
In 1972, using the float of Blue Chip Stamps, Buffett and Munger acquired the small Los Angeles-based See’s Candies for $25 million. It was a major step for Charlie and Warren because it was their biggest purchase up to that time.
It was big news in California, where See’s Candies black and white candy shops are part of the local culture. A 16-year-old Cher was working at See’s when she met Sonny Bono and left her job to move in with him as his housekeeper.
Mary See was 71 when she opened a small, Los Angeles neighborhood candy shop in 1921, although she had the help of her son Charles.
Charles A. See had been a pharmacist in Canada, but changed careers after his two pharmacies were destroyed when a forest fire swept through the town where he did business. He took up work as a chocolate salesman and dreamed of starting his own candy company using recipes developed by his mother. In 1921, he moved his family, including his widowed mother, Mary, from Canada to Pasadena, the beautiful and refined Los Angeles suburb that Charlie would later adopt as home. During the 1920s, Los Angeles was a booming city of 500,000 residents. It wasn’t an easy go for the Sees, since there were hundreds of competitors. See and his partner, James W. Reed, decided to concentrate on building a reputation with a high-quality product.
When the stock market crashed in 1929 and the Great Depression hit, See’s Candies was forced to cut the price of a pound of candy from 80 cents to 50 cents. He survived by persuading landlords to reduce his rents, arguing that lower rent was better than no rent. But he also had an opportunity to expand his markets as other candy-makers went bankrupt. A second crisis came during WWII when sugar was rationed. Rather than compromise quality with inferior ingredients or altered recipes, See’s decided to produce as much high quality candy as possible with the ingredients that were allocated to the company and no more. Customers lined up around the block to buy the limited supply of chocolates, and once the supply was gone, the shop closed for the day. No matter what time the store closed the sales staff was paid for a full day of work. This turned out to be a smart marketing ploy, since the waiting crowds added to the candy stores cache.
See’s Candies was already 30 years old when Charles Huggins joined the company in 1951. The head office was then in Lois Angeles. But Huggins started in the San Francisco facility. When Harry See, Mary’s grandson, took over the company after his brother’s death, Huggins was given responsibility for expanding the company’s business. Harry See, Huggins said, “He enjoyed life tremendously, was a world traveler, established vineyards in Napa Valley. After a while the family decided collectively to sell the company and cash in their chips. Chuck Huggins was coordinator and liaison for that.
“We started in the spring of 1970. We had a couple of very serious suitors, such as a big-four sugar company from Haw
aii that owned C&H and others. The family wanted a pretty heady ransom for the company and that dissuaded several buyers.”