Lesson in patience & value

Source: Buffett 2007 Letter to Shareholders

Let’s look at the prototype of a dream business, our own See’s Candy. The boxed-chocolates
industry in which it operates is unexciting: Per-capita consumption in the U.S. is extremely low and doesn’t
grow. Many once-important brands have disappeared, and only three companies have earned more than
token profits over the last forty years. Indeed, I believe that See’s, though it obtains the bulk of its revenues
from only a few states, accounts for nearly half of the entire industry’s earnings.
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 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.)