Intensive reading notes:
1. The growth of See’s Candy comes from two aspects: one is the increase in unit price; the other is the increase in sales. During the 11 years from 1972 to 1983, the unit price increased by an average of 10% annually, the sales volume increased by an average of 3.5%, and the net profit rate increased from 6.6% to 10.3%. When the total sales volume only increased by about 45%, the net profit increased by 5.5 times. (I unconsciously think of $Kweichow Moutai (SH600519)$ here. It would be great if Moutai’s PE was 12 times at this time. But there is still a gap between Moutai and See’s Candy in terms of operation. Moutai is not completely a family in a certain sense A public company needs to assume additional social responsibilities, unlike See’s Candy, which only needs to focus on rewarding shareholders)
2. In 2007, See’s Candy had a net asset of 40 million and a pre-tax profit of 82 million. (Perspective ROE=205%, here I assume that See’s Candy does not have wasted funds, which is an assumption made on the basis of fully believing in Buffett’s ability to allocate funds.) From 1972 to 2007, See’s Candy accumulated Only 32 million yuan of the profit earned was used to supplement the company’s working capital. (This is also a matter of course, because See’s Candy’s perspective ROE is high enough at the time of purchase, which determines that the efficiency of reinvesting capital is extremely high), and two factors help the company’s operations. Source of ROE): 1. Products sold are settled in cash, which eliminates accounts receivable; 2. Production and distribution cycles are short, which helps keep inventory to a minimum.
3. A good brand needs long-term accumulation, and a valuable and stable customer base is worth ten thousand dollars. For companies that pursue product quality, high raw material costs are usually not a problem, because they themselves need to use the best raw materials. At this time, we need to focus on costs other than raw materials. The growth rate of costs should theoretically match the growth rate of the general price level (inflation rate). Buffett uses per pound as the basic unit to measure costs.
4. The reason why a good company will be sold is due to the change of the operator. This kind of opportunity is rare. The ROE of See’s Candy at that time was 26%, and the price given by Buffett was 12 times PE and 3.1 times PB.
5. Stagnant sales may be a problem faced by the entire industry. Buffett measures a store’s operating performance by the number of pounds of candy sold per store rather than by sales. (I don’t quite agree with it here, and I don’t think it’s a problem to measure it by sales.) The failure to increase sales may be affected by factors such as pricing strategies, market prosperity, and market share.
6. Firms in stable industries with long-term competitive advantages that offer strong returns even without organic growth.
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The following is the original part:
Buffett’s investment in See’s Candy in 1972
See’s Candy Company was founded in 1921 by a Canadian confectioner. Its products are made of high-quality raw materials and carefully processed. Even during World War II when raw materials were scarce, See’s Candy Company did not cut corners. Has a high brand awareness .
The company was jointly owned by two brothers, Larry the older brother, and Harry the younger brother, who was a playboy type interested in wine and women. The company was managed by his brother Larry. After Larry died in 1972, Harry had no intention of running it and wanted to sell it.
In 1972, the sales of See’s Candy was 31.33 million yuan, the net profit was 2.08 million yuan, and the net assets were about 8 million yuan. Harry’s selling price was 30 million yuan.
Both Buffett and Munger were interested in the company and planned to use Blue Ribbon Printing Company to buy See’s candies. In particular, Munger felt that it had a very good business model , but Buffett was deeply influenced by Graham, and felt that buying a company with a price-earnings ratio of 15 times and a price higher than 2 times net assets would kill him. Buffett’s upper limit of the purchase price was 25 million US dollars. Fortunately, Harry finally accepted this price. ( At that time, See’s Candy was valued at 12 times PE, 3.1 times PB, and 26% ROE. )
In the 11 years from 1972 to 1983, the sales of See’s candy increased from 31.33 million to 133 million, and the average annual income increased by 14%. The factor driving sales growth is that the unit price of products has increased from US$1.8/lb to US$5.4/lb, with an average annual growth rate of 10%, and sales volume has an average annual growth rate of 3.5%. The net profit of See’s Candy increased from 2.08 million to 13.7 million, and the average annual net profit increased by about 20% . Net profit margin increased from 6.6% to 10.3%. The company’s total sales of candy only increased by about 45%, while net profit increased by 5.5 times.
In the 2007 annual report, See’s Candy had a revenue of 380 million yuan and a pre-tax profit of 82 million yuan. If the net assets are only 40 million, the ROE will reach an astonishing figure.
Later, when Buffett reviewed See’s Candy, he listed it as one of the greatest investment objects of his dreams. From 1972 to 2007, See’s Candy contributed a total of US$1.35 billion in pre-tax profits to Berkshire, only 32 million yuan of which was used to supplement the company’s working capital, and all other funds were used to purchase other profits Prosperous enterprise, like Adam and Eve, beget and multiply.
Letter to shareholders in 1983: “See’s Candy’s business performance is still outstanding. It has a valuable and stable customer base and management . In recent years, See’s has encountered two major problems. Fortunately, at least one of them has found a solution. , this question is related to cost, but it does not refer to the cost of raw materials. Although our raw material cost is higher than that of our competitors, we would be unhappy if the situation is reversed. In fact, raw material cost is beyond our control, because no matter what No matter how the price changes, all the raw materials we use are of the highest quality, and we regard product quality as the most important point.
But other costs are something we can control. The problem lies in this. Our cost (based on per pound, excluding raw material cost) is increasing much faster than the general price level. If we want to reverse the current competitive disadvantage With the profit crisis, it is absolutely necessary to reduce costs. Fortunately, the costs have been effectively controlled in recent months. I believe that the cost increase rate in 1984 will be lower than inflation. This confidence comes from our cooperation with Chuck over the years The experience of working together, he has been in charge since we bought See’s, and his performance is obvious to all as the following table:
Another problem we have, as you can see in the table above, is that the pounds of candy we actually sell have stagnated, which in fact is a common difficulty in the industry, but we have outperformed our peers significantly in the past, But now it’s just as miserable. The average number of candies we sold per store has not changed much in the past four years, although the number of stores has increased (and sales expenses have also increased), and of course the turnover has increased a lot due to our sharp price increase, but we It is believed that the standard for measuring a store’s operating performance is the number of pounds of candy sold by each branch rather than sales. In 1983, the sales volume of an average store decreased by 0.8%, but this is a better performance since 1979. The cumulative The decline amounted to about 8%, and the collective order volume (about 25% of the overall sales) has stagnated after the growth peak of the 1970s.
We are not sure whether the sales volume of branch stores and collective orders cannot increase, mainly due to our pricing strategy, or the recession, or our market share is too high. However, in 1984, our increase was several times higher than before The year has been mild, and we hope that the sales reported to you next year will increase as a result, but we have no basis for guaranteeing that this will happen.
In addition to the problem of sales volume, See’s has many important competitive advantages. In our main sales area – the west, our candy is preferred by consumers, and they are even willing to spend two or three times more to enjoy it (candy is like Just like stocks, price and value are different, price refers to what you pay, but value refers to what you get) , the service quality of our direct sales stores in the United States is as good as our products, and the friendly and caring service personnel Just like the logo on the packaging, it is not easy for a company that employs 2,000 seasonal employees, and it is all thanks to the hard work of Chuck and all his colleagues. And since we adjusted prices only slightly in 1984, next year’s profit is expected to be only as good as this year’s. “
2007 Letter to Shareholders: “We look for businesses that have a long-term competitive advantage in a stable industry. It would be great to have rapid organic growth. Will still provide good returns. We just take the good profits the business makes and buy similar businesses elsewhere, there is no rule that says you have to put your money where you are already making money. In fact, it is often the wrong thing to do : It is impossible for outstanding companies that obtain high rates of return on tangible assets to reinvest most of their profits into the company at a high rate of return for a long time.
Let’s look at an archetype of a fantastically good business, like our See’s Candy Company. There’s nothing exciting about the boxed chocolate industry the company operates in – per capita chocolate consumption in the US is extremely low and has never grown, and many once-famous brands have disappeared, and over the past 40 years, Only three businesses made decent profits. In fact, while much of See’s revenue comes from just a few states, I believe the company makes nearly half of the industry’s profits.
When Le Cordon Bleu bought See’s Candy Company in 1972, the candy company was selling 16 million pounds of candy a year (Charlie and I acquired a controlling interest in Le Cordon Bleu at the time and eventually integrated it into Berkshire). See’s Candy Company sold 31 million pounds last year, an annual growth rate of just 2%. Yet the enduring competitive advantage that the See’s family has built over the past 50 years and has since been reinforced by Chuck Higgins and Brad Kinstler has produced extraordinary returns for Berkshire.
We bought See’s Candy Company for $25 million when it had sales of $30 million and pre-tax profits of less than $5 million. The capital required to run the business is $8 million (plus some modest seasonal debt for a few months each year). Therefore, the pre-tax investment rate of return on invested capital in this company is 60%. Two factors help the company minimize the amount of capital it needs to operate—first, products sold are cash-based, which eliminates accounts receivable, and second, short production and distribution cycles help keep inventories to a minimum .
Last year, See’s Candy had sales of $383 million and pre-tax profits of $82 million. The capital required to run the business today is $40 million, which means we have only needed to reinvest $32 million since 1972 to handle minimal expansion of the business—and achieve impressive financial growth. Pre-tax profits for the period totaled US$1.35 billion. Except for the $32 million, all of these profits went to Berkshire (and Blue Ribbon for the first few years). After paying the corporate profit tax, we use the rest of the funds to buy other attractive businesses, just like Adam and Eve’s actions brought 6 billion people, See’s has brought us a lot of new cash Fountainhead (for Berkshire, he is, as the Bible says, “fertile and fruitful”).
There aren’t many businesses like See’s in the U.S., and for many, increasing profits from $5 million to $82 million could require a capital investment of around $400 million. This is because growing companies, with sales growth, will also have a year-on-year increase in demand for working capital. In addition, there are also significant requirements for fixed asset investment.
A business that requires a substantial increase in capital for growth can be a satisfying investment. Continuing with our own company example, it doesn’t feel shabby to make $82 million in pre-tax profits from $400 million in net tangible assets. But it’s a whole different story for business owners who want to generate increasing cash flow, preferably without significant capital requirements. This can ask Microsoft or Google. “
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