Becoming Berkshire: 1972 - See's Candies
Issue 21| The acquisition of See's Candies in 1972 marked the beginning of Berkshire's focus on high-quality businesses and showcased the powerful partnership between Buffett & Charlie
It has been said that the elixir of life is a combination of Cherry Coke and Peanut Brittle. This has undoubtedly added to the longevity of Warren Buffett and Charlie Munger. Additionally, See's Candies has played a pivotal role in Berkshire, as the acquisition of See’s was seen as a watershed moment in Berkshire's rich history.
Charlie summed up the importance of Berkshire when he was asked about his favorite acquisition.
“Well, I don’t think I have a favorite, but the one that probably did us the best as a learning experience was See’s Candy. It’s just the power of the brand, the unending flow of ever-increasing money with no work. And I’m not sure we would have bought Coca-Cola if we hadn’t bought Sees. I think that a life properly lived is just learn, learn, learn all the time. And I think Berkshire has gained enormously from these investment decisions by learning for a long period.
Charlie & the Chocolate Factory
The story of See's Candies begins in the town of Timmins, in the snow forest of Northern Ontario, where a young man named Charles A. See ran two pharmacies in the Porcupine gold-mining district.1
On July 11, 1911, a brutal forest fire swept through the district, burning everything to the ground. Charles wadded into Propupine Lake with his wife to await the firestorm. Waves lapped around their necks as the fire raged through town. With his pharmacies and home demolished, Charles went looking for work in Toronto. He found a job as a Canadian sales rep for Merckens- one of the oldest chocolate manufacturers in the United States- selling candy-making ingredients in bulk to bakeries and small confectioneries.2
Selling chocolate came naturally to Charles, who eventually turned his attention to the booming economy of Los Angeles, which was the land of opportunity. In the spring of 1920, he left Canada with his recently widowed mother, Mary See, his wife, and their two children.3
In 1921, Charles See found a financial backer and opened up the first See's candy shop at 135 Western Avenue North in Los Angeles. In the back of the shop, there was a candy kitchen where the recipes that he had enjoyed as a child were made with the same care as in his mother's kitchen.4
That year, when General Mills came up with the fictional character Betty Crocker as its figurehead. Charles turned to his mother, Mary See, whose principles inspired his business ethics and whose recipes for candies like Chocolate Walnut Fudge and Victoria Toffee were the cornerstone of his success. He put her picture on every box of chocolates. 5
Charles founded See’s Candies on two unwavering principles: using his mother’s recipes and sourcing the finest butter, cream, chocolate, fruits, and nuts available.
By 1925, there were a dozen See's Candy shops across Los Angeles.
When the stock market crashed in 1929 and the Great Depression hit, See’s was forced to cut the price of a pound of candy from 80 cents to 50 cents. Charles survived by persuading landlords to reduce his rents, arguing that lower rent was better than no rent. During WWII, when sugar was severely 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. 6
See’s Candy was big news in California, where See’s black-and-white candy shops were part of the local culture. A 16-year-old Cher worked at See’s when she met Sonny Bono and left her job to move in with him as his housekeeper. The See’s factory in Los Angeles was home to the famous I Love Lucy Chocolate Factory episode.
The 1950s were the era of suburbanization in the United States. Charles' son Laurance led the way as he opened See's Candies in the shopping malls across California. By 1960, the chain consisted of 124 stores. During the 1960s, See's moved into Arizona, Oregon, and Washington and grew to 150 shops. With solid profits, See's outperformed local competitors and rivaled Hershey, Russell Stover, and other national Brands. In 1969, Laurance died. His Younger brother, Harry, a stockholder and director, was to succeed him, but Harry was torn over succession, as he also ran a vineyard everywhere in the state. Reluctantly, the See Family, which owned 67% of the stock, decided to sell.7
The Deal
Rob Flaherty, an investment advisor to Blue Chip, heard that a premier chocolate chain was for sale. He contacted William Ramsey, a Blue Chip executive, who was enthusiastic about buying See's and decided to call Buffett.8
"Gee, Bob," Buffett said. " The Candy business. I don't think we want to be in the candy business."
For some reason, the phone line then went dead. Ramsey and Flaherty hurriedly tried to call Buffett back; finally, after the secretary misdialed the number and several minutes elapsed, they reconnected before they could speak.
Buffett burst out: "I was taking a look at the numbers. Yeah, I'd be willing to buy See's at a price.”9
Buffett, Munger, and Guerin met with Chuck Huggins, Ed Peck (CEO), and Harry See.
Chuck Huggins on the deal:
"So we sat and talked a couple of hours. Harry explained who they were, which didn't mean anything. Berkshire Hathaway, everyone thought that was a shirt company. Nobody knew who Charlie was, and Rick might have been involved in property development. He had some relationship with Blue Chip. Anyway, Warren made a lot of comments; Charlie would periodically interrupt and put in his comments. Rick didn't say anything. We got to a point where it was evident that they were serious about buying See's. There were two things that needed to be resolved - how much to pay and how the business would be run. ' Warren then said to Harry. ' If we go through with this, we don't run companies. I need to know who will run the company.'"10
See's had a tentative deal on the table already and wanted $30 million for assets worth $5 million. The difference was See's brand, reputation, trademarks, and, most of all, its customer goodwill. 11
Because of See's low book value, Buffett & Munger decided not to exceed $25 million. The talks ended, but later, See called back and accepted the $25 million. Munger and Buffett purchased See's Candy on January 3, 1972, paying three times book value, something they'd never done before.12
In “Beyond Buffett,” Laurance Cunningham explains that the See family accepted $5 million less because Buffett and Munger chose Charles N. Huggins, a long-time employee, to preserve See’s traditions.13
At this point, Buffett was too busy to run the company, and he seemed to follow the same playbook he had used with Berkshire Hathaway.
Huggins on the acquisition:
"When the purchase was publicized in the newspaper, it became known that Blue Chip had bought it. "Well," said Huggins, "People didn't have a lot of respect for the company. They'd just been through an antitrust case- they looked bad. That left a bad taste in the mouths of our most faithful customers. I spent a lot of my time dealing with customers who were concerned and mad that the family had sold, and now it was in the hands of a company that would ruin Sees. Suddenly, we got a lot of hate mail, people claiming that candy had changed." See's long-term customers were used to a general experience when visiting the shops and were in a near panic. They filled their local stores to express their concerns, which, in turn, upset the employees.
The Numbers
Buffett and Munger decided that See's was like a bond—worth paying $25 million for. If the company had paid out its earnings as Interest, the interest would have averaged about nine percent. That was not enough—owning a business was riskier than owning a bond, and the interest rate was not guaranteed. But the earnings were going up, on average, by 12% per year. So See's was like a bond whose interest payments grew.
"We thought it had uncapped pricing power. See's was selling candy for about the price of Russell Stover at that time, and the big question in my mind was, if you got another 15 cents a pound, that was two and a half million dollars on top of four million dollars of earnings. So you really were buying something that perhaps could earn six and a half or seven million dollars at the time."14
At the price Blue Chip offered, $25 million, the $4 million it was earning pre-tax would give Buffett and Munger a payback of nine percent after-tax on their investment from the first day they bought it- not factoring in future growth. Adding in $2 to $3 million of price increases they thought See's could institute, the return on their capital would rise to 14% - a decent return; the key was whether the earnings would continue to grow.15
"See's Candy," reminisced Munger, "It was acquired at a premium over book [value], and it worked. Hochschild, Kohn, the department store chain, was bought at a discount from the book and liquidating value. It didn't work. Those two things together helped shift our thinking to the idea of paying high prices for better businesses.16
Once again, Jacob Mcdonough in Capital Allocaiton has done the heavy lifting for us.
Sales had increased 13 years in a row leading up to Blue Chip's acquisition, going from $13.7 million in 1958 to $28.2 million in 1971. This is a compound annual growth rate of 5.7%. The gross margin increased from 44.6% to 54.4% over this period, while the net profit margin went from 3.8% to 8%. The Business also produced positive earnings in the previous 20 years. Net income compounded 8.9% over this period, growing from $0.4 million in 1951 to $2.4 million in 1971.17
Here’s Buffett discussing See’s at the 2007 annual meeting
“At See’s, annual sales were 16 million pounds of candy when Blue Chip Stamps purchased the company in 1972. (Charlie and I controlled Blue Chip at the time and later merged it into Berkshire.) Last year (2006) See’s sold 31 million pounds, a growth rate of only 2% annually. Yet its durable competitive advantage, built by the See’s family over a 50-year period, and strengthened subsequently by Chuck Huggins and Brad Kinstler, has produced extraordinary results for Berkshire.
We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital.
Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories. Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). 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 six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command to “be fruitful and multiply” is one we take seriously at Berkshire.) There aren’t many See’s in Corporate America. Typically, companies that increase their earnings from $5 million to $82 million require, say, $400 million or so of capital investment to finance their growth. That’s because growing businesses have both working capital needs that increase in proportion to sales growth and significant requirements for fixed asset investments. A company that needs large increases in capital to engender its growth may well prove to be a satisfactory investment. There is, to follow through on our example, nothing shabby about earning $82 million pre-tax on $400 million of net tangible assets. But that equation for the owner is vastly different from the See’s situation. It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.” 18
The acquisition of See's Candies in 1972 was a pivotal moment that fundamentally changed Berkshire Hathaway's investment philosophy. This $25 million purchase marked Warren Buffett's shift from seeking undervalued "cigar-butt" stocks to focusing on high-quality businesses with strong intangible assets. See's reinforced the idea of the immense value of brand strength, customer loyalty, and pricing power—factors that are not always reflected in financial statements. The company's ability to raise prices without losing customers demonstrated the importance of a durable competitive advantage, or "moat," which became a cornerstone of Berkshire's future investment strategy.
Buffett was no stranger to a company's franchise value, as this was the rationale behind his American Express investment in 1963.
The See's name was a franchise, and its minimal capital requirements and high cash returns provided valuable insights into capital allocation. Buffett has credited this acquisition with shaping many future investments, famously stating, "If we hadn't bought See's, we wouldn't have bought Coke." This shift in philosophy, which emphasizes quality over mere book value, has been a key driver of Berkshire's remarkable long-term success, transforming a relatively small investment in a candy company into the birth of multiple new streams of cash.
Finally, I wanted to share Buffett's note to Chuck Huggins in 1972. It truly conveys Buffett's excitement and belief in See's brand value.
Becoming Berkshire 1930-1971:
Issue 20| 1971 Part 3- The Nixon Shock
Issue 19| 1971 Part 2- Supermoney
Issue 18| 1971 Part 1- The Dean & The Disciple
Issue 17| 1970 Part 2 - Blue Chip Stamps
Issue 15| The Go-Go Years of the 60s
Issue 14| 1969- Part 2 Illinois National Bank
Issue 13| 1969 - Part 1 Buffett Retires
Issue 12| 1968 - Sun Newspaper & Blacker Printing Company
Issue 11| 1967 Part 2 - National Indemnity
Issue 10| 1967 - Buffett & Clyde
Issue 5| 1963/64 - The American Express Salad Oil Swindle
Issue 4| 1963 - I Want to Hold Your Hand
Issue 1| 1930-1949 - An Oracle is Born
Sabre Arc Portfolio Updates:
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August 2024 Review: $1,094,182
Moss Pick, Margaret: See’s Famous Old Time Candies: (San Francisco, Chronicle Books, 2005), Pg. 23.
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Moss Pick, Margaret: See’s Famous Old Time Candies: (San Francisco, Chronicle Books, 2005), Pg. 24.
Moss Pick, Margaret: See’s Famous Old Time Candies: (San Francisco, Chronicle Books, 2005), Pg. 19.
Lowe, Janet: Damn Right! Behind the Scenes with Berkshire Hathway Billionaire Charlie Munger:( New York, Wiley & Sons, 2000), Pg. 127.
Cunningham, Lawrence: Berkshire Beyond Buffett - The Enduring Value of Values: (New York, Columbia School Press 2014), Pg. 14.
Lowe, Janet: Damn Right! Behind the Scenes with Berkshire Hathway Billionaire Charlie Munger:( New York, Wiley & Sons, 2000), Pg. 128.
Id.
Id.
Schroeder, Alice. The Snowball: Warren Buffett and the Business of Life. (New York: Bantam, 2008), 300.
Lowe, Janet: Damn Right! Behind the Scenes with Berkshire Hathway Billionaire Charlie Munger:( New York, Wiley & Sons, 2000), Pg. 129.
Cunningham, Lawrence: Berkshire Beyond Buffett - The Enduring Value of Values: (New York, Columbia School Press 2014), Pg. 14.
Id.
Id.
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Mcdonough, Jacob. Capital Allocaiton: The Financials of a New England Textile Mill.(Las Vegas: Jacob McDonough, 2020), Pg. 101.
Berkshire Hathway Meeting 2007.
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Buffett is known for being “hands off” when it comes to subsidiary operations, but See’s has long been an exception, as we can see from that fascinating letter. For decades, Buffett personally set pricing for See’s (maybe he still does) and received weekly sales reports (I bet he still does). Buffett’s greatest talent and best use of his time has long been capital allocation but he has a first rate mind for operations as well. I can’t imagine being a subsidiary manager and not seeking his input.