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Nevertheless, Huggins was feeling positive about See's new owners. "I got the strong feeling that we were the luckiest people in the world. Warren reminded me of someone I admired-Will Rogers. Homey, trustworthy, absolutely brilliant. It was as if he'd run a business just like ours. Charlie was similar-I was a little guarded with Charlie. He was very absolute. Warren left some room for your opinion. With Charlie, it was `hep, two, three, four,' but I got used to that. It was just his style."
But, Huggins learned not to take Munger lightly. "If you've ever tried to get Charlie off a position, you're wasting your time. He sort of huffs and tosses his head, and you can forget anything from there on."
"While Blue Chip owned us, it was clear Warren, Charlie, and Rick were the owners," said Huggins. "I asked, `you'll all disappear-exactly how do you want me to communicate with you?' Warren said `Do what you've been doing. Let us know if there are danger signs, trouble, but you just keep us informed. Figure out some way to do that.' He said, `If you can build on what the See family has done, make it more grand, that would be good.'"
Then Buffett added an observations about the candy itself, "You're priced well below the market."
Despite Huggins' positive feeling about the deal, there were problems. His immediate challenge was to convince loyal customers that See's would not change under the new owners.
First, in 1972 when the purchase was publicized in the newspaper, it became known that Blue Chip had bought it. "Well," said Huggins. "People didn't have a lot of respect for the company. They'd just been through an antitrust case-they looked bad. That left a bad taste in the mouths of our most faithful customers. In 1972 and 1973, I spent a lot of my time dealing with customers who were concerned, mad that the family had sold and now it was in the hands of a company that would ruin See's. Suddenly we got a lot of hate mail, people claiming the candy had changed."
See's long-term customers were used to a genteel experience when visiting the shops and were in a near panic. They filled their local stores to express their concerns, which in turn, upset the employees.
Huggins wrote in the company newsletter. "This must seem like a time of the most profound changes in the 51-year-history of our company. Yet there is even more that has not changed. We will not change our personal relationships with employees or customers. We want to go forward without losing any of the vital ingredients that have gone into the making of See's Candy." It took Huggins nearly two years to smooth over the uproar caused by the sale of See's.
Once the dust settled, See's started expanding into markets in Missouri, Texas, and Colorado and even as far away as Hong Kong. See's participated in the 1982 World's Fair in Knoxville, Tennessee, and the exhibit was such a success that See's opened a shop in Knoxville.
A recession hit in the 1980s, however, and many of the out-of-state shops were closed. Customers in distant locations were forced to order by catalog and telephone.
During this same period, the Retail Clerk's Union attempted to organize the salesforce in the stores. See's since has triumphed in four attempts to organize by the Retail Clerk's Union, mainly by paying higher than union-scale wages. See's later had problems with union truck drivers who delivered the product, but through a labor negotiator were able to cancel their contract and transfer the work to a private trucking company, which then rehired most of See's senior drivers.
At one time, See's came under attack by a major candy producer from the Midwest.
"In 1973, Russell Stover Candies [which traditionally was sold through other retailers] went heavily into their own stores. They decided to put on a campaign with See's and beat us out in our own marketplace," recalled Huggins. "They put in stores that looked exactly like See's, called Mrs. Stover's. They duplicated our identity and tried to grab our market. Of course, I informed Charlie and Warren about the fact."
Munger said, "If they are infringing on our trademarks in any way, we can go after them."
"Then, Charlie gave me a lot of direction of what to look for," said Huggins.
Huggins hired a photographer and told him to take pictures of things in the Stover stores that resembled See's trade dress, such as checkerboard floors, lattice in the windows, and old-fashioned photos on the walls.
"Charlie said `I want this to be handled by a partner at Munger, Tolles. She was born in California, teaches at University of California at Los Angeles Law School. I will assign her to this action. I want you to come to the office and meet her.' It was Carla Anderson Hills. I met her and liked her. It took me about 30 minutes to realize that she was the same personality type as Charlie."
What kind of personality was that? "Go get 'em," said Huggins, snapping his fingers in the air. "It was fun. The upshot was, Charlie scared them to death with all these planned legal responses if they persisted. They backed off. They agreed they wouldn't put in any more copycat stores, and after a time would change the ones they had."
Part of See's competitive advantage is that it is a leader in its market. "In some businesses, the very nature of things is a sort of cascade toward the overwhelming dominance of one firm," said Munger. "It tends to cascade to a winner-take-all result. And these advantages of scale are so great, for example, that when Jack Welch came into General Electric, he just said, `To hell with it. We're either going to be number one or number two in every field we're in or we're going to be out.' That was a very tough-minded thing to do, but I think it was a correct decision if you're thinking about maximizing shareholder wealth."'
During that period, Huggins came to the opinion that Munger was a very practical person. "The Ben Franklin thing is appropriate. Charlie's as corny as hell, but what more do you need?"
The problem with encroachment on its territory took several years to resolve, said Huggins, and there were other difficulties as well. During President Richard Nixon's wage and price controls, for example, the company had to operate differently.
Once the problems of the early days were under control and See's was running smoothly, Munger and Huggins spent less time together. "The personal and direct contact has diminished over the last 10 years." said Huggins. "I miss that. I now talk to Warren on a regular basis. We talk on the phone every 10 days or so. He and Charlie then talk. I don't need to call both."
IN THE 1990s, SEE'S STARTED a more cautious expansion, and rather than build more stores, they established counters at airports and in department and other stores.
At the end of the century, See's operates approximately 250 blackand-white shops across the United States, with two-thirds of them in California. The company sells 33 million pounds of candy a year. More than 75,000 pounds of candy was sold through See's Internet site, a competitor to its own toll-free order service. The company's 1999 sales were $306 million, and its pretax operating profit was $73 million.
Though it doesn't compare to the year-end holiday season, the Berkshire Hathaway annual meeting each May in Omaha is an important day for See's. "We did $40,000 [in sales] at the 1999 annual meeting," observed Huggins. "Warren's proud of that."
"SEE'S CANDY," REMINISCES MUNGER. "It was acquired at a premium over book [value] and it worked. Hochschild, Kohn, the department store chain, was bought at a discount from book and liquidating value. It didn't work. Those two things together helped shift our thinking to the idea of paying higher prices for better businesses."'
When they bought See's, Charlie and Warren still were bottom fishers. But as they learned and as the business grew, change was necessary. "You could once find value by just rooting around in the less traveled parts of the world-the pink sheets-you'd find a lot of opportunity," said Charlie.'
It was only luck that Blue Chip was able to buy See's at the price they paid. Munger credits Al Marshall for giving the final push toward the correct decision.
,,If they had wanted just $100,000 more for See's, we wouldn't have bought it," said Munger. "We were that dumb hack then.""'
Even so, "When we bought the business, almost nobody was having much success selling box
ed chocolates except See's, and we wanted to know why that was, and if the success was sustainable," said Buffett.
When See's turned out to be an excellent, ongoing business, Munger and Buffett realized how much easier and pleasanter it was to buy a good business and just let it roll along, than to buy a deeply discounted but struggling business and spend time, energy, and sometimes more money setting it straight.
"If we hadn't bought See's, we wouldn't have bought Coke," said Buffett. "So thank See's for the $12 billion. We had the luck to buy the whole business and that taught us a whole lot. We've had windmills, well, I've had windmills. Charlie was never in the windmill business. I've had second rate department stores, pumps, and textile mills ..." which he decided were nearly as problematic as the windmills.
Munger says he and Buffett should have seen the advantages of paying for quality much earlier. "1 don't think it's necessary to be as dumb as we were."u
See's is a slow grower, but its growth is steady and reliable-and best of all, it doesn't take additional infusions of capital.
"We've tried 50 different ways to put money into See's," explained Buffett. "If we knew a way to put additional money into See's and produce returns a quarter of what we're getting out of the existing business, we would do it in a second. We love it. We play around with different ideas, but we don't know how to do it."
Munger added, "By the way, we really shouldn't complain about this because we've carefully selected a bunch of businesses that just drown in money every year."12
Munger told Berkshire shareholders that there are a large number of businesses in America that throw off lots of cash, but which cannot be expanded very much. To try to expand would be throwing money down a rat hole, he said. Such businesses don't stir acquisition desires in most corporations, but they are welcome at Berkshire because he and Buffett can take the capital and invest it profitably elsewhere.'3
Incidentally, that is the same reason Berkshire pays no dividends. Berkshire holds on to cash when Buffett believes retained earnings can produce more in market value for shareholders than would likely be possible if the earnings were not reinvested within the company.
From Sees, said Munger, "We've learned that the ways you think and operate must involve time-tested values. Those lessons have made us buy more wisely elsewhere and make many decisions a lot better. So we've gained enormously from our relationship with Sees."' +
Despite See's place of honor in the Berkshire crown, it now represents only a tiny portion of Berkshire's value to its owners. Even if See's were now worth $1 billion, which is conceivable in light of its sales, that is less than 2 percent of Berkshire's market capitalization.
C H A P T E R T W E L V E
THE BELOUS CASE
Charlie has no enemies in the sense of fighting or confrontation. He has enemies in the larger sense-generated from envy. His personality is unique, but it does not appeal to everyone. I know women who don't want to sit next to him at dinner parties.
Otis Booth
NGLANI's KING GEORGE CALLED THE American colonist Benjamin ' Franklin the "most dangerous man in America," though Franklin was well received when he first arrived in England in 1757. Soon after establishing himself in London, Franklin realized that the British knew very little about the colonies. Often the wag, he took it upon himself to set the British straight. "To read the English papers," Franklin wrote, "one would think America didn't produce enough wool to make it pair of stockings a year; whereas the tails of American sheep were so heavy with wool, little wagons had to be tied under them for support."'
During his 16 years there, Franklin dazzled the British with his originality. He invented bifocal eyeglasses, a 24-hour clock for navigation, and urged the adoption of daylight-saving time. But he shocked Londoners by swimming in the Thames and working out with dumbbells totally in the nude. Finally, largely because of political differences but partly because some were jealous of his popularity, he was expelled from England.'
When Franklin sailed to France in 1776 to become the American ambassador, America's most famous citizen again was given a hearty welcome. According to the French Ambassador to the United States (in 1999) Francois Bujon de I'Estang, Franklin had qualities that "French people revere: He was cheerful, witty, and humorous.... The story goes that he had not been allowed to write the Declaration of Independence for fear he would hide a joke in it."3
Warren Buffett often teases Munger about how often he quotes Poor Richard's Almanac and preaches Franklin's moral messages:
Buffett: "Charlie overdosed on Ben Franklin early in his life, and he believes that a penny saved is a penny lost."
Charlie: "I can tell you a lot about Warren, he reminds me of Ben Franklin, I can tell you a lot about Ben Franklin."
'Jam a biography nut myself," said Munger, "and I think when you're trying to teach the great concepts that work, it helps to tie them into the lives and personalities of the people who developed them. I think that you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among the eminent dead, but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better in life and work better in education. It's way better than just giving the basic concepts."'
Munger has studied the lives and scientific writings of Albert Einstein, Charles Darwin, and Isaac Newton, but his favorite eminent dead person has always been Franklin, a passion that he shared with Warren Buffett's first serious mentor, Benjamin Graham. Munger admires Franklin for being the best American author of his time, the best investor, scientist, diplomat, merchant, and greatest contributor to educational and civic causes. Though he admits that Franklin had a lusty side to his personality, and perhaps neglected his wife, Munger says that stories of how badly Franklin behaved reflect a shallow understanding of Franklin, his situation, and the tines in which he lived.
It was from Franklin that Munger gleaned the concept of becoming wealthy so that he could be free to make a contribution to humankind. "I always cared more about being useful than dying rich," said Munger, "but sometimes I drift too far away from this idea."
Franklin was the son of a candle maker who had too many children, and at an early age Ben made his way from Boston to Philadelphia to escape an apprenticeship with a cruel brother. From an early age Franklin strove to be it better person and build a better life. After the phenomenally successful Poor Richard's Almanac made Franklin both famous and rich, he devoted his life mostly to public service.5
Like Franklin, Munger has learned that his ideas about a good and proper society do not always coincide with the beliefs of others. Though most of the French continued to find Franklin interesting and entertaining during his sojourn in Paris, the king became so jealous that he put Franklin's picture on the bottom of a chamber pot he gave to his mistress.
As SEVERAL HUNDRED FANS OF Warren Buffett and Charles Munger crowded the front entrance to Gorat's steak house in Omaha on the Sunday evening before the 1998 annual meeting, they confronted a disturbing sight. About a half dozen protestors trudged back and forth on the sidewalk, carrying lurid placards showing fetuses floating in bottles and proclaiming Buffett and Munger baby killers because they have been longtime supporters of human reproductive rights. One sign attacked Buffett's charitable foundation for its funding of tests for the RU-486 abortion pill.'
When asked at Berkshire's annual meeting about the company's contributions to pro-choice causes, Buffett explained that under the corporate contributions plan, shareholders are allowed to designate a charity of their choice and then gifts are given in proportion to the number of Berkshire shares owned. "The policy is designated by shareholders. There are a number of shareholders who designate Planned Parenthood. The Buffett Foundation contributes to Planned Parenthood. Charlie gives to Planned Parenthood. Put Charlie's name on the signs."
Charlie demurred: "I am perfectly willing to have that limelight passed."
Most of the protestors knew only that Buffett
and Munger are longtime and generous contributors to Planned Parenthood and to other organizations committed to population issues. They were largely unaware that Charlie and Warren were pioneers in the abortion rights movement. Thanks to Munger, they were influential in getting the right to abortion legalized in California, a pivotal legal decision that preceded the Roe vs. Wade case in the U.S. Supreme Court.
"I would say 99 percent of Charlie's friends are Republican or very right wing. He's generally regarded that way. Most of Charlie's friends also were unaware of his pro-choice activities," observed Buffett.
Munger confounded other conservatives and irritated the religious right by his admiration and financial support of Garrett Hardin, author of the well-read 1993 book, Living Within Limits. Hardin was among the earlier scientific writers to warn of looming population problems. He and others point out that it took civilization until 1804 to reach one billion people, but only 12 years to jump from five billion to the current global population of six billion. In the next one hundred years, the population of the United States alone will double from 275 million to 571 million. Experts estimate that before world population growth stops or reverses, there could be 10 billion people on earth. Such a large population already is putting stress on the earth's resources, including production and distribution of food. At the end of the twentieth century, an estimated 800 million people were malnourished due to difficulties of growing or buying enough food.
A professor emeritus of human ecology at the University of California at Santa Barbara, Hardin has written extensively on biology, ecology, and ethics. During the 1960s, Hardin was known as "Mr. Abortionist" because he championed abortions in hundreds of speeches around the country.