Warren Buffett Bought This Company for $25 Million. Now It Makes Nearly $100 Million Every Year

Warren Buffett owns more than 70 businesses. But it turns out one simple one is his "dream."

Jul 13, 2014 at 12:13PM


“Buy commodities, sell brands” has long been a formula for business success. It has produced enormous and sustained profits for Coca-Cola since 1886 and Wrigley since 1891. On a smaller scale, we have enjoyed good fortune with this approach at See’s Candy since we purchased it 40 years ago.

Warren Buffett wants us to see that the formula for a business's success isn't difficult to understand. But it's mighty hard to do.

Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) invested in Coca-Cola (NYSE:KO) in the late 1980's and finally stopped buying shares in 1994. Since then the value of Coca-Cola has more than tripled, as Buffett saw his position -- which cost $1.3 billion -- grow from being worth $5.1 billion at the end of 1994 to $16.5 billion today.

Coca-Cola has made Berkshire Hathaway a lot of money, but Buffett's "dream business" of See's Candy has been wildly more profitable. Not surprisingly, the "formula for business success" mentioned above -- which Buffett said in 2011 -- has been the same for both.

Sees Candy By Bob N Renee

Source: Flickr / Bob n Renee.

The little business that could
Berkshire Hathaway bought See's Candy for $25 million in 1972, the year it had roughly $30 million in sales and brought in $4.2 million of profit.  As a result of its small size, we can't track its results over the decades, but 35 years later, in 2007, Buffett noted sales had risen nearly 13 times to stand at $383 million.

Even more impressive, Buffett revealed profits were up nearly 20 times and stood at $82 million. That means Berkshire now earns nearly three times the cost of its original investment each year.

But perhaps what is even more remarkable is that, in 2011, Buffett said See's had brought in a staggering $1.65 billion in total profits since he bought it 40 years ago.

So how has See's been so successful? Let's see what Buffett has to say.

Buy commodities
In 1972, See's sold 16 million pounds of candy, and 35 years later, it stood at 32 million, meaning it gained just 2% a year, but it's profit rose by 9% a year:

Source: Berkshire Hathaway Annual Letters.

So how'd See's do it?

It's easy to think it made massive investments to boost sales. But Buffett revealed, in that 35-year period, only $32 million worth of money had been put back into See's. Instead, Berkshire Hathaway benefited as Buffett "used the rest to buy other attractive businesses."

The reason behind this is simple. At its core, See's is a commodities business. It sells products made from peanuts, sugar, chocolate, and more, and it can raise its prices little by little with each passing year. While what it costs to buy the ingredients used to make the candy will rise, it has the ability to continuously raise its prices too.

In 1972, it sold 17 million pounds of candy, and by 1984, that number had grown to 25 million pounds, a gain of roughly 50%. Yet it went from having $31 million in revenue to $136 million, an increase of 333%. How did it do it? Little by little, it raised its price per pound:

Source: Berkshire Hathaway Annual Letters.

Of course, these 12 years saw major inflation, but the thing is, even after factoring that in, if prices had stayed the same, the $1.85 per pound of See's Candy in 1972 should've cost $4.60 by 1984. Yet instead it stood at $5.49 per pound, showing how much of an advantage operating in a commodity business can be.

As a result, the growth in profits was the most impressive result, jumping by 540%, from $2 million to nearly $13.5 million.

Sell brands
Operating in a commodity business can be treacherous if that's the only thing going for it. But See's not only had favorable underlying business dynamics, but it had a powerful brand that allowed it to slowly raise its prices and boost its profitability year after year.

In Buffett's own words, when they bought it in 1972:

What we did know was that they had share of mind in California. There was something special. Every person in California has something in mind about See's Candy and overwhelmingly it was favorable...If we can get that in the minds of people, we can raise prices. 

Investing in an industry that has favorable dynamics can seem like the key to success. But in the case of See's Candy, countless other candy firms have fallen by the wayside.

Buffett wants us to know the key to success for any business -- whether it's one we've started or one we're investing in -- isn't just the opportunity for profits, but a strong brand to ensure they're realized.

Warren Buffett just bought nearly 9 million shares of this company
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Patrick Morris owns shares of Berkshire Hathaway and Coca-Cola. The Motley Fool recommends Berkshire Hathaway and Coca-Cola. The Motley Fool owns shares of Berkshire Hathaway and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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