Quality Without Compromise

See’s Candies, Warren Buffett and the perfect investment.

PDF Version of “Quality Without Compromise”

See's Candies

William Ramsey, an executive at Blue Chip Stamps, stood in the office of Robert Flaherty as they both awaited a call. Moments earlier, Flaherty attempted to persuade Warren Buffett, majority owner of Blue Chip, to con­sider purchasing See’s Candy Shops Inc., a popular West Coast candy maker. Buffett turned them down—up until then, he was used to buying boring businesses on the cheap: banks, textile mills and insurance companies. Ramsey however, thought See’s was a great buy, and desperately tried to get Buffett back on the phone. Their sec­retary finally got hold of Buffett at his home in Omaha. He had reviewed the numbers, and liked what he saw.

After consulting with Charlie Munger, Buffett’s friend and business partner, they were willing to make an offer. This would be Buffett’s biggest investment to date, and he wasn’t one to overpay for anything—the deal al­most fell through during negotiations, but the sellers finally accepted their proposal. The final price was $35 per share. With one million shares out­standing and $10 million in cash on the books, the net purchase price was $25 million. Blue Chip Stamps now owned 67.3 percent of See’s Candy Shops, with the remainder purchased from about 2,200 public holders in the months after. But one thing remained unfinished: who would run the com­pany? Buffett made it clear upfront that they wouldn’t be calling the shots at See’s. Suggested by the previous owner, Buffett, Munger and a friend named Rick Guerin met with Charlie Huggins—executive vice president and twenty-year veteran of See’s. After three hours of discussion, Buffett knew that Huggins was the man for the job.

The History

The first See’s Candy shop was opened in Pasadena, California in 1921 by Charles See and his mother, Mary See. Each made their own contributions: Mrs. See used the recipes she had created over the past fifty years of candy making; Charles had studied the me­thods of a successful chain of candy shops in their native Canada.

Many customers remember the stores for their signature black and white motif, which started at this first store and was designed to resemble Mary See’s home kitchen. Under the leadership of Charles See, the com­pany steadily grew throughout Cali­fornia. They successfully navigated the business through the Great Depression and World War II, when sugar was se­verely rationed and customers lined up around the block to buy See’s limited amount of chocolates. By the time Charles died in 1949, the company had seventy-eight stores and two manufacturing plants: the original in Los Angeles, and a second in San Francisco.

Through the next two decades See’s Candy was run by Charles’ two sons, Laurance and Harry See. The brothers expanded the shops into neighboring states and grew the num­ber of locations to over 150 by the end of the ’60s. Two years after the death of Laurance See, his younger brother Harry no longer desired to run the business and sought to pursue other interests (he owned a vineyard in Napa Valley). After over a half century of family ownership, See’s was put up for sale. One of the several interested par­ties was Robert Flaherty, investment advisor to Blue Chip Stamps.

The sale was finalized in 1972, and See’s Candy Shops was now a subsidi­ary of Blue Chip. Not long after, Blue Chip would be folded into Berkshire Hathaway and See’s would become one of the first members of Warren Buffett’s cash generating conglome­rate. At first, employees and customers were worried that the new owners would change See’s for the worst. When the purchase was first publi­cized in the local papers, everyone now knew who the buyer was, and people didn’t have a lot of respect for them (Blue Chip had recently been through an antitrust case). Charlie Huggins was in charge of the transition, and recalled that he spent a lot of time “… dealing with customers who were concerned, mad that the family had sold and now [they were] in the hands of a company that would ruin See’s.” Angry patrons would send hate mail—claiming the candy was bad, and See’s had somehow changed it.  It took Huggins almost two years to convince loyal customers and employees that nothing had changed, and that product quality and customer service would be better than ever.

In the first year of operation under new ownership, See’s sold about s­e­venteen million pounds of candy for just over $31 million. This number continued to grow steadily under the shrewd management of Charlie Huggins. Fourteen years after his promotion, Huggins remained modest. “Our candy is a third of the price of say, Godiva chocolates,” he told a local paper. “They do a wonderful packaging job, though. Consumers seem to think that if the box is beautiful, the candy inside must be just as good. But quality wise, we feel that we’re at least their equal.”

At the close of the twentieth century, See’s Candies had expanded to over two-hundred-fifty black-and-white shops across the United States, a majority of which were located in Cal­ifornia. Since the acquisition, this represented an average of over three successful store openings a year. Customers purchased thirty-three million pounds of candy annually, giving the company earnings of $73 million on $306 million in sales (to put this in perspective, thirty-three million pounds of candy equated to almost one-pound of candy per resident of California at the time).

The Manager

Charles N. Huggins regularly made inspections of the See’s factories—calling workers by their first names and taste testing chocolates, carefully “measuring” their quality and consistency. Naturally, See’s encourages all employees to eat as much candy as they like. It’s Huggins’ belief that any employee who loves a certain variety of candy will express that love in their work, and ultimately to the customers.

Chuck was born in Vancouver, Canada and first began working at See’s in 1951, when he was twenty-six years old. His first supervisor was Ed Peck, the general manager in San Francisco. As the company expanded, Huggins continued to work his way up the ranks, earning the trust of the See family. By the time Huggins was handed the role of Chief Executive Officer in 1971, he had worked in various positions at the company for over two decades. Almost immediately, Warren Buffett knew that Huggins was the right man for the job: “It took me fifteen seconds to decide to make Chuck C.E.O. and President, and to this day I wonder why it took so long.” There is no doubt that without Charlie at the helm, See’s wouldn’t be where it’s at today.

Over the years Huggins led by the following management tenets: 1) Concentrate the efforts of all employees to attain ever-increasing excellence in cus­tomer service and product quality; and 2) Never compromise quality ingredients or service over profits. Commenting on his style of management, Huggins listed a number of traits that were essential to his success: the ability to solve problems, the desire to learn, curiosity, discipline, creativity and patience.

Huggins was a “Level 5” leader, as characterized by Jim Collins in the book “Good to Great,” in all respects. He was an insider who knew the business well and was fanatically driven toward results. He channeled ambition into the company, not himself, and blended personal humility with strong professional will. Asked to explain See’s business, Huggins said, “It’s about the customers. It’s about making sure the customer is pleased, whatever it may take, no matter how outrageous. … There are certain things we do inadvertently… where we dissatisfy the customer. And when that happens, we always admit that we blew it, and ask what we can do to make it right. And then we stand on our heads until we get that done.”

The Moat

Quality is one of the most impor­tant aspects of See’s advantage over competitors and a key element in the marketing of their products. See’s chocolates are all preservative-free, and each box has the date and location in which it was filled so that the cus­tomer can see that they are getting the freshest product. Ingredients from suppliers are carefully examined by Quality Assurance teams at the factories for microbiologic compliance and purity. The See’s Candy brand name is the moat that ensures See’s will continue to be the dominant chocolate producer on the West Coast for years to come.

Commenting on these advantages, Charlie Munger says that “…in some businesses, the very nature of things is a sort of cascade toward the overwhelming dominance of one firm. It tends to cascade into a winner-take-all result.” Product quality is just one of the many contributors (albeit a very important one) to the brand—along with customer service, store image and the public’s mental perception of the product. A few non-candy examples illustrate this point: Most people would much rather be seen drinking their latte from a cup brandishing the green Starbucks logo than from some other generic brand. A loving husband could probably find a diamond necklace for his wife a lot cheaper off the internet—but if he handed her a similar necklace encased in a robin’s-egg-blue box from Tiffany & Co., she’d know that he loved her. And likewise, come February 14, your significant other won’t think twice about where that heart-shaped box of chocolates will come from—after noticing the See’s “Famous Old Time” Candies logo on the front, the box doesn’t even need to be opened.

Marketing plays a huge role in this perception. Customers know that the three-word motto “Quality Without Compromise” is not taken lightly at See’s. Buffett constantly reminded Charlie Huggins about what they were really selling—“Maybe the grapes from a little eight-acre vineyard in France are really the best in the whole world, but I have always had a suspicion that about 99% of it is in the telling and about 1% is in the drinking.” In 1989, after an 8% year-over-year increase in pounds sold (a very high number for same-store growth); Buffett explained that shrewd advertising was the cause. That year, advertising expenditures had been increased from $4 million to $5 million. “When business sags,” says Buffett, “we spread the rumor that our candy acts as an aphrodisiac. Very effective. The rumor, that is; not the candy.”

Another reason that See’s was able to grow so successfully throughout the years was their astute real estate planning. During the 1950s, population growth in California resulted in an even larger increase in suburban development. It was during this period of suburban expansion that the modern day shopping mall was born. Laurance See recognized the potential of malls and expanded See’s into new developments locally, and for the first time, outside of California. For stand-alone stores, the See brothers would attempt to place them on the shady side of downtown roads, assuming that people are more likely to walk on that side of the street when it’s hot outside. Throughout the years, See’s has been very careful not to expand too quickly and only open a location when it makes sense. “The ordinary company puts in too many stores,” says Charlie Munger. “You have this huge overhead you’re carrying through July and August, and you just can’t get well at Christmas. But See’s has always had the discipline of knowing their own business.”

In hindsight, See’s would become one of Warren Buffett’s most important investments. The com­pany had all the traits that he would later look for when making a purchase: a family owned, well managed business with strong competitive ad­vantages and little need for additional capital.

Continue reading Part II in the PDF version…

(Originally posted on the Gannon on Investing site on 9/12/07)

3 thoughts on “Quality Without Compromise”

  1. The most delicous chocolates in the world. Could I open a store in Sydney Australia PLEAAAAAAAAASE?
    Kindest Regards
    Johanna

    Like

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