Warren Buffett calls it a "dream business." Cher, Bill Gates, and millions of Californians love it. Now CEO Brad Kinstler is ready to take the quaint candy maker east. Will it work?
The plant workers of See's Candies start arriving each day at 4 a.m. In Los Angeles and San Francisco they stand at their stations and drizzle fondant onto maple pecan bonbons or count the nuts in each almond royal. They spread rum nougat into flat pans or break up chunks of cashew brittle by hand. All the while, they wear the signature white lab coats with their first names embroidered on the front in black stitching -- similar to the ones in the famous 1952 I Love Lucy episode, for which Lucille Ball trained at See's. By 9 a.m., many of the workers break for lunch.
Meanwhile, in the Kiewit Building on Farnam Street in Omaha, Warren Buffett is largely unaware of what is beginning at See's. His Berkshire Hathaway group (BRKA) acquired the little candy company in 1972 -- exactly 40 years ago -- for $25 million. The boxed-chocolate industry is small, with total sales estimated at just under $2 billion a year in the U.S., and does not often grow year to year, although it is up 4% in 2012. See's, which had sales of $376 million in 2011, $83 million of it profit, represents an infinitesimal drop in the bucket of Buffett's other holdings, which include fat stakes in American Express (AXP), Coca-Cola (KO), and IBM (IBM). But of all his investments, the regional candy maker remains Buffett's fondest.
Of course, the Oracle doesn't worry himself with the day-to-day management of companies he owns; his biggest act of participation in four decades was in 2006 when he installed longtime Berkshire insurance man Brad Kinstler to run things after Chuck Huggins, who had been with the company 54 years and was CEO for 33 of them, retired.
Now Kinstler, 59, is embarking on a plan to spread out across the country. You may know See's from airport kiosks on trips to the West Coast, but of the company's 211 shops, none are east of Chicago. In the next three years See's plans to open stores in states like Florida, Georgia, Pennsylvania, and Maryland, and in Washington, D.C. Whether it will be successful is uncertain; past attempts have not worked that well. The plan means risk -- though measured -- for a business that, like Buffett himself, is usually about patience and caution. But Kinstler is more determined than anyone before him to make it happen.
Charles A. See, a salesman from Ontario, opened the first See's shop in 1921 in Los Angeles. With its now iconic black-and-white tiles, it was made to look like the kitchen of his widowed mother, Mary. Today the shops still offer the same experience: walk-in customers can sample any piece. "That's the best marketing we have," says chief financial officer Ken Scott, who has been at See's 34 years. "If people try it, they'll love it." It's true. Maybe it's the fresh ingredients (See's uses no added preservatives) or the California water, but there is something about See's. The candy tastes exceedingly good.
Warren Buffett has loved See's since he first tried it in 1971, after hearing about it from his West Coast colleague Charlie Munger, who in turn heard about it from Robert Flaherty, an outside investment counselor at Blue Chip Stamps, a trading-stamp company Berkshire had invested in the year before. Munger and Buffett now say they were stingy in their initial offer, but Munger's friend Ira Marshall convinced him it was an unusual company, worth spending more to get. "Ira really shamed us," admits Munger. "Warren and I were too cheap." So Munger persuaded Buffett to buy. They paid up.
Munger, sitting in the reading room of his L.A. home -- the 88-year-old is currently enjoying a biography of Deng Xiaoping -- ticks off a lot to like about See's from a management perspective. The company has changed very little in 91 years, incurs low overhead, and can raise prices by up to 5% each year, thanks to brand loyalty. People are fanatical about See's, and Buffett is no exception. "When you were a 16-year-old, you took a box of candy on your first date with a girl and gave it either to her parents or to her," he says. "In California the girls slap you when you bring Russell Stover, and kiss you when you bring See's."
Over the years Buffett's strategy had often been to invest in undervalued "cigar stub" companies. See's was different: a strong brand that Californians loved. He has called See's a "dream business," one capable of greatly increasing its profits without needing much new capital. Berkshire is therefore able to allocate most of See's profits to whatever businesses or investments Buffett thinks best.
And Buffett finds additional lessons in See's. For starters, it has taught him about branded goods. "It's one thing to own stock in a Coca-Cola or something, but when you're actually in the business of making determinations about opening stores and pricing decisions, you learn from it," he tellsFortune, sitting in his office with a box of See's chocolate lollipops (his favorite) on his desk. "We have made a lot more money out of See's than shows from the earnings of See's, just by the fact that it's educated me, and I'm sure it's educated Charlie too."
See's employees feel the same kind of affinity for the company. Most have been there for decades, and they get so delighted talking about working there that they make Google (GOOG) employees look like detainees. Beatriz Romero has been wrapping Scotch kisses (a fresh marshmallow covered in caramel and wrapped tightly like taffy) for 41 years, and she is not an unusual case. The upper-level team is also made up of See's lifers. Eileen Duag (pronounced doo-ag), vice president of product, has been there 32 years. Johnnie Woods, "customer centricity" director, for 24. Dan Dias, who runs order processing, has 17. They consider Kinstler, with his almost seven years, brand-new.
Kinstler began his career at Cornhusker Casualty, an Omaha insurance company Berkshire opened in 1970. In 1991 he went to run Cypress Insurance in San Mateo, Calif., for nine years before moving on to Fechheimer Brothers, a Berkshire-owned, Cincinnati-based uniform maker. In 2005, Buffett and Munger tapped him to move back to California and take over See's. Kinstler says he knew little about the business, but jokes, "As soon as I found out I get free candy ..."
That vanilla sense of humor belies the ambitious steps Kinstler is now taking to bring Mary See's recipes to the rest of the country. Until the early 2000s, See's stayed west, except for a brief stint in the '80s when Huggins opened a few stores in St. Louis and Texas. They struggled because of competition from the likes of Fannie May (no, not mortgage giant Fannie Mae) and because the company opened them too quickly in untested markets. See's had to retreat. Today it remains a Western phenomenon; 110 of its 211 stores are in California.
See's does, however, open seasonal carts in shopping malls all across the country -- called "holiday gift centers" (HGCs) -- that are around only for Christmas (a few reopen for Valentine's Day and Easter). It uses their success to measure where a permanent shop might do well. Based on HGC performance, See's opened its first two stores in Dallas this summer and will open three more in Texas this year. It is slowly moving across the country. In 2012 it is on track to open five stores in Texas, one in Oklahoma, one in Wisconsin, and one in Indiana. Next year it plans to open in Missouri, Ohio, Michigan, Kentucky, Tennessee, and Pennsylvania. For 2014, Kinstler envisions stores as far east as Florida and Washington, D.C.