Warren Buffett Writes About His Investment In See’s Candies, Inc.

Warren Buffett Writes About His Investment In See’s Candies, Inc.
By Mark Hirschey (Work of Mark Hirschey) [CC BY-SA 2.0], via Wikimedia Commons

Warren Buffett Writes About His Investment In See's Candies, Inc.

In his last letter to shareholders, Warren Buffett CEO of Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) mentioned his investment in the candy-maker, See’s Candies, Inc. is owned by Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) By his standards, it is a minuscule holding.

What’s important is that over the years since its purchase in 1972 for $25 million, the candy chain has generated profits of $1.65 billion for Buffett, who said in 2007: “After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to 6 billion humans, See’s has given birth to multiple new streams of cash for us.”

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Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s See’s Candies, Inc. is significant also for another reason: it marked a radical shift in the way Buffett evaluated investments – for the first time, instead of looking for undervalued assets that could be bought for throwaway prices, he bought a “quality” business at a fair price. Though, tongue-in-cheek, Buffett recalls, “I almost blew the See’s purchase. The seller was asking $30 million, and I was adamant about not going above $25 million. Fortunately, he caved.”

An article in Fortune  by Daniel Roberts provides useful insight into this little gem of a business, and how Berkshire intends to take it forward in a changing business milieu.

First, the business has all the characteristics dear to a value investor like Buffett, who in fact calls it a dream business – it does not require a huge investment, has fast moving inventories, and no receivables, as customers pay in cash, and runs with low overheads.

What’s more, brand loyalty enables the chain to hike prices every year by 5 percent without hurting sales.  A lot of this has to do with their simple strategy of allowing a visiting or prospective customer to taste any item on the store shelves – free. The customers are usually bowled over by the excellent taste of the products considering the quality of the ingredients that go into their making, and end up making a purchase. The initial purchase leads to a lot many more, and See’s becomes a fixture for that customer. This simple mode of brand development and marketing provided useful education to Buffett, who says in the article: “We have made a lot more money out of See’s than shows from the earnings of See’s, just by the fact that it’s educated me, and I’m sure it’s educated Charlie too.”

In the net result, the chain multiplies profits without needing constant doses of capital investment and keeps loyal customers. So why change a good thing?

Yet, change is in the offing, seeing that the company is under the charge of Brad Kinstler, who is planning to take the candy chain truly national by opening stores in hitherto unrepresented areas of the U.S.

Kinstler’s plans for expansion have led him to appoint Tracy Cioffi as new VP of marketing. Her work is cut out – help the brand acquire new customers. She plans to do this with help from the social and on-line world. With a presence on Facebook and a website, the company gets 65% of its orders from on-line customers.

However, the expansion into new territories and the increased on-line presence require the setting up of a new production facility. Again, distribution further into the country may require longer transit times and a challenge to the chain’s “no preservatives” claim.

It could also lead to supply chain issues, as currently all ingredients are purchased fresh from local suppliers. Another hurdle could be the competition that could come with new markets.

But Cioffi is unfazed, and says it might be all about the approach to branding. According to the article she intends to change the tenor of See’s customer approach.  “Right now, I would say we’re sweet,” she says. “I want to get us to where we’re sweet with a wink.”

In breaking news, it has been reported that Chuck Huggins, died today at the age of 87.

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