Collection: Mohnish Pabrai - #108 'Buffett's Investment See's Candies'



[Transcript]

MOHNISH PABRAI 00:00

So in 1972, they (Buffett & Munger) bought See's Candy. And how many of you are customers of See's? Have you ever had See's Candy? How many of you have never had See's Candy? We have a few unfortunate humans. (Laughter)


Maybe you can – next time, you're going to some airport, you know, get some peanut butter brittle. That might be a good start.


But anyway, so they bought See's in 1972. And in 1972, they bought See's for $25 million and the deal almost didn't happen because the family that was selling, wanted $30 million for the company.


And Warren was already choking at $25 million, he thought that $25 million price was really rich. And the reason why Warren thought $25 million was rich was, See's was a company at that time, was generating about $2 million a year in cash flow, they had $8 million in net book value, and the purchase price was $25 million. So they were paying more than 3 times book value for the business.


And when the family said they wanted $30 million, Warren just said that at 25 million and 1 cent, I'm out of here, you know, so you can either take the $25 million or you know, we will walk. And they're very grateful that the family didn't walk and sold them the business for $25 million.


And 12 years later, in 1984, See's was earning $13 million. So in 1972, they bought it was making $2 million, in 1984 – 12 years later – it was making $13 million, the book value had gone from $8 million to $20 million. And the unit volume over that 12 years period had only gone up by about 2% a year on average.


So if you look at the See's Candy purchase from 1972 and take it all the way to today, the unit volume growth of See's has been about approximately 2%. Well you know, number of pounds of candy they sell every year has gone up about 2% a year over the last, let's say, 45 years or 44 years or so.


But the earnings have gone up significantly more than that. It's a private company, they don't disclose the numbers, I would guess that See's is probably approaching $100 million, maybe somewhere in the $70 to $100 million, maybe more than that in terms of earnings per year at this point.


And California GDP from 1972 till now (2016) has gone up at probably 5% or 6% a year. So See's did not keep up with California GDP growth over that period from a volume growth perspective. And in fact, even the 2% volume growth that has come in – has come in with square footage increase. So their retail space went up by approximately that number which led to that growth.


And Warren and Charlie say that the river of cash that came out of See's funded the zillion other things with Berkshire. So they would – if you ask them today, you know, what is the value of See's to Berkshire?


They will probably couldn't even tell you – but it would be in the tenths of billions, it will be very significant in terms of what it did. And you were to ask them today that – you know, so Charlie says that we were barely smart enough in 1972 to buy See's, barely smart enough. Because he says that, you know, if the family didn't budge to our stupid demands of $25 million, we will walk.


And actually, if you go backwards and think about it, they could have pay a $100 million for that business. And it would have been a low price based on what happened after that, right? So it was a phenomenal business.


And the only thing Warren did – the only input he provided to management – they kept the same management, Chuck Huggins kept running the company. The only thing he did was, he said that on January 1st of every year, I will send you the new price list, so he took over pricing for the company.


So you know, all the peanut brittle and all that [inaudible] pricing and everything else. Beginning of the year, Warren will look at, you know, okay, you know, inflation is 3% let's bump all the prices by 12%. And year after year, what he found is that they could raise prices significantly above the rate of inflation. And it didn't have any negative impact on sales, sales just kept going.


And but they also found out a few other things, they got a huge education in brands and branding. And that education in brands and branding, so it's very fundamental to the Coke purchase.


So See's is a California phenomenon, you know, people in California – if I have the same talk going on at Columbia University or something and ask the same question, they'll looked at me like I was from Mars, they never heard of See's except for the few that have gone to Omaha.


So they repeatedly tried and – Warren and Charlie occasionally would try to mush management to expand See's into other geographies. And every time they try to expand other geographies, they would fall flat on their face.


So they opened a store, I think one time they had a store in Chicago, it never worked. They opened stores in several geographies, it never worked. And but slow expansion in California has worked.


And so they found that the brand had certain brand value in California, they also found that people were willing to pay a premium for See's Candies in California. But that same cachet didn't follow through in other location.


(Source: https://youtu.be/jfxOvdiac94)

 

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