2014: Why was See’s Candy able to grow its profits through the ’70s, ‘80s and ’90s, but not, so far, in this millennium?

JONATHAN BRANDT: See’s Candy is obviously small in the context of Berkshire’s currently expansive operations, but has long been one of your favorite businesses.

And no wonder, given that its pre-tax profits grew consistently from less than $5 million in 1972 when Berkshire acquired it, to $74 million in 1999.

However, since 1999, profit growth appears to have stalled.

Can you explain why See’s was able to grow its profits through the ’70s, ‘80s and ’90s, but not, so far, in this millennium?

Did something change about the business, for instance, the growth and demand for boxed chocolates or its market position?

Could you or Brad Kinstler discuss whether the relatively recent geographic expansion could help reignite See’s growth? Thank you.

WARREN BUFFETT: Yeah, the boxed chocolate business is, basically, not growing.

I mean, if you go back 100 years, the — each city of any size was characterized by lots of candy shops. Chicago was a big leader. New York was a big leader.

Believe it or not, the predecessor company to Pepsi Cola was the — a company with the most — it was a company called Loft’s — that had the most candy shops in New York City.

It was a candy shop company, originally, that a fellow that — what was his name?

CHARLIE MUNGER: [Charles] Guth.

WARREN BUFFETT: Yeah. What was it?

CHARLIE MUNGER: Guth.

WARREN BUFFETT: Yeah. He acquired Pepsi for a few thousand bucks, stuck it in Loft’s.

And the corporate — the corporate name, if you go all the way back on Pepsi, is Loft’s.

So there were loads of candy shops around everyplace. And including in Omaha.

Boxed chocolates have lost position dramatically. Primarily, I would guess, to salted snacks of one sort or another. Various things.

See’s has done remarkably well, far better than any chocolate company in the country.

Russell Stover did very well for a while. Very well, with a different business model. But, you know, they ran into their problems as well.

So, we can’t do much about increasing the size of the market. And we’ve tried a lot of ways. And we’ve tried moving out of our strong geography, multiple times.

I mean, Charlie and I looked at what we were earning in California in the ’70s and said to ourselves, “If we could do this in 50 states instead of one, you know, we’ll get very rich.”

So we tried it and we didn’t get very rich. It doesn’t travel that well.

CHARLIE MUNGER: Well, sometimes it does and sometimes it doesn’t. And you figure out whether it’s going to work by trying it.

WARREN BUFFETT: Yeah. And we’ve tried it many times.

But so far — it’s interesting. Two-thirds — people in the East prefer dark chocolate, two-thirds to one-third. In the West, they prefer milk chocolate, two-thirds to one-third.

They like miniatures in the East. They won’t eat miniatures in the West. There’s a lot of different things.

But in the end, there isn’t a lot of boxed chocolates volume.

And we’ve done very, very, very well in See’s. And it not only has provided us with earnings that we’ve used to buy other businesses, so we’ve added lots of earnings power through See’s, beyond the earning power we’ve added at See’s.

But it opened my eyes to the power of brands and probably you could say that we made a lot of money in Coca-Cola partly because we bought See’s, or at least in my case, bought See’s, because I’d understood brands to some degree, but there’s nothing like owning one, and sort of seeing the possibilities with it as well as the limitations, to educate yourself about things you might do in the future.

And in 1972, we bought See’s. And in 1988 we bought Coca-Cola.

And I wouldn’t be at all surprised, if we had not owned See’s, whether we would’ve owned Coca-Cola later on.

Charlie?

CHARLIE MUNGER: Yeah. There’s no question about the fact that its main contribution to Berkshire was ignorance removal. And it’s not the only big contributor to ignorance removal.

If it weren’t for the fact we were so good at removing our ignorance, step by step, Berkshire would be practically nothing today.

What we knew originally wasn’t enough. We were pretty damn stupid when we bought See’s. We were just barely smart enough to buy it.

And if there’s any secret to Berkshire, it’s the fact that we’re pretty good at ignorance removal. And the nice thing about that is we have a lot of ignorance left to remove. (Laughter)

WARREN BUFFETT: Well, that’s what happens when I call on him. (Laughter)