Buffett Understood See’s Competitive AdvantageThe Acquirer's Multiple
In their recent episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discussed Buffett Understood See’s Competitive Advantage. Here’s an excerpt from the episode:
Jake: This week my friend, Haren Bhakta sent me this 1972 letter that Warren Buffett wrote to Chuck Huggins, who was the president of See’s Candy. This is shortly after acquisition and it’s funny because it really is Buffett was this kid in a candy store and he went and visited one of the candy stores that [unintelligible [00:18:26] like LA. [chuckles] It was a little funny to read, because he is a kid in a candy store and he’s getting way down in the weeds of this, but I guess, when you dole out $25 million or whatever to buy it, you get pretty excited. But I thought I would run through some of the highlights of it and then maybe some of the takeaways. So, does that sound fun for you guys?
Tobias and Bill: Yeah.
Jake: All right. The first quote out of it is, “People are going to be affected not only by how our candy tastes, but obviously, by what they hear about it from others, as well as the retailing environment in which it appears,” which includes the class of the store, the packaging, and the surrounding merchandise. “The surroundings in which our candy is offered affect potential customers mental and even gastronomical impression of our quality.” Right away, this reminds me of Rory Sutherlands terrific book, Alchemy, which looks at really this idea that there’s an engineering answer for everything, but then there’s also usually a human answer as well that has to do with our perceived reality. He had this famous story, Sutherland did about. These engineers were looking to spend billions of dollars to straighten out part of this track to shave 30 minutes off of a four-hour commuter train ride.
Well, instead for 1/1000th of the cost, they could have put in big screen TVs into every seatback, and had models serving drinks, and you wouldn’t even want to get off the train at that point. The fact that it’s four hours doesn’t bother you. Buffett’s recognizing that even the taste of the chocolate is impacted by the surroundings around it and probably, every Michelin rated restaurant understands that all. That’s why there’s so much exactitude and sweeping the breadcrumbs up with the little brush, like there’s just a lot of attention to detail which makes everything taste better. So, Buffett was complaining about how stowers had in the display at this store was organized in an exclusive and attractive part of the store, and the See’s was just sitting on this counter with 25 other cheap offerings of cheap candy and this generic signage that the store had just written on the back of a napkin basically. I think he wasn’t very happy about it. [laughs]
Buffett said, “They have to be offered in a way that establishes them as something that’s very special and they need to be insulated away from inferior products.” They started talking about all this stuff requires small scale testing, which is interesting and there’s a book that came out probably five or six years ago called Little Bets that uses this idea of lots of little iterations of trying things out to see what works, and fail small, and never bet the farm. Then, he starts getting into, when they do take See’s outside of the existing territory, Buffett subscript suggested this writing up this descriptive material for it, this little story book, a booklet that might be called the most famous kitchen in the world. He talks about how Coors got a lot of mileage out of all of their beers coming from this one specific factory in Colorado with the best water. He said that there’s a mystique attached to products with a geographical uniqueness. He talks about this, maybe there’s this 80-acre vineyard in France that supposedly has the best grapes, but he said, “I’ve always had the suspicion that about 99% of it is in the telling and about 1% is in the drinking.”
Then he said, “It should be very hard to get available only periodically and then to the consumer, apparently only in limited quantities.” So, what this is telling you is that Buffett understood the McRib before it was a thing. He got consumer psychology way back in 1972 when he was 42 years old and he’s been playing the game ever since. I thought it was an interesting little– I love to get his real time thoughts in a specific situation at very early days just to see like, “Well, what the hell was that guy thinking about at that time?” So, that was that was Buffett’s letter to Chuck Huggins.
Tobias: That was fascinating. Do you visit See’s stores to buy chocolate or just to do a channel check or whatever?
Jake: I have been to a few several. There’s one two miles from my house. But I typically won’t go there to buy candy. I only buy See’s mostly at Berkshire meeting or actually, I have a fun tradition of buying a box usually in the airport and getting stiffed and taking it with me if I’m going to another shareholders meeting, especially with friends are I’m traveling with and making it a little bit of a festive event for us, but yeah.
Tobias: It’s a good idea. I’m always struck by a few things. One, there’s one near a house. My wife likes one of the dark chocolate peanut brittle.
Jake: Oh God that’s so good.
Tobias: Unfortunately, I go and get her some of those every now and again. It’s funny for a candy store. It’s huge for one thing. It’s much, much bigger, I think than it needs to be. It’s completely white on the inside.
Tobias: All of the chocolate is in basically cellophane bags or out on display in this little paper cups. There’s not much packaged up. But it’s always really busy, too and it’s extraordinarily expensive. So, it’s a good mix. It’s not intuitive to me at all, that’s the way that you do it.
Jake: Is it a pretty old store, do you think? Because it started down in LA so, I wouldn’t be surprised if it was one of the earlier.
Tobias: It can’t be that all. It’s in a reasonably newish sort of– [crosstalk]
Jake: Well, yeah. Okay.
Tobias: Yeah, like row of stores. But it’s off Hawthorne. There’s always a lot of traffic on Hawthorne. It is very busy road here. But there’s always lots of traffic in that parking lot as well. At any time of the day, I always try and sneak down at some time where I don’t think there’s going to be anybody there. It’s always busy. It just– [crosstalk]
Jake: Almost like sugar is addictive. [laughs]
Tobias: But there’s other easier options for getting this– I don’t know. I’m aware of See’s, but only by virtue of the fact that I’m like Buffett Berkshire See’s, not the other way around. And then lots of people know about it otherwise, I guess.
Jake: Oh, yeah. I remember getting it as a kid, really young, maybe three or four and it would just be only during Christmas. There’d be one box, you could have a half of a piece per night kind of thing. And so, it felt very special, and very exclusive, and quite the treat.
Tobias: I can see the margins as I’m walking around the store.
Jake: Yeah. [laughs]
Tobias: There are big margins on this stuff.
Tobias: I don’t know. Good business.
Bill: Never had an attachment. Ghirardelli was probably the closest thing that like a chocolate store that I had an attachment to.
Jake: Oh, yeah?
Bill: Yeah. My buddy, Alex was out at a couple of this. He said that it looks like they mean some reinvestment.
Tobias: [laughs] They really do. They’re utilitarian. But I guess, it works because it’s busy. The packaging doesn’t look expensive, either.
Jake: They don’t sell a ton more poundage wise than they did over the years. It’s just the price has just [sound].
Tobias: The price has gone up.
Jake: And guess what? It hasn’t gone up that much. The machinery to create it.
Tobias: Yeah, the prices are eye opening. Every time I’m in Omaha, we go to that little store in Omaha. It’s just mind boggling what they can charge, but they sell so much of it. If you get something out, good for them.
Bill: Yeah, well. Omaha is a little different. You can do a lot to your cult members.
Tobias: But it’s the same deal.
Tobias: I think that there’s a little discount in Omaha, isn’t it? Well, maybe there’s not.
Bill: I don’t know. I’m usually paying no matter what he’s charging there. Because I need to get something to bring home show that I was thoughtful.
Jake: $25 million have to buy it and I think it’s spun off now north of $1.5 billion over that time period. You just got to do that one time in life. Just find one of those. [laughs]
Bill: Yeah, it’s pretty good.
Tobias: Do that one time and then reinvest those numbers, just even at a SPY and that’s a very, very big number. [crosstalk] Spend the first 10 years reinvesting and then, go bananas.
Bill: Yeah. I’m going to retire if that happens.
Bill: I will not be working.
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Article by The Acquirer's Multiple.