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As soon as the purchase was agreed Huggins (now made President and CEO) and Buffett arranged a very simple remuneration package. It was discussed for a mere five minutes, never written on paper and lasted for decades. So much for the need for pay consultant, lawyers and pages of “Directors Remuneration Reports” so beloved of most CEOs.
Buffett’s managerial style
Buffett being Buffett, he started to take a keen interest in some of the key aspects of the business, particularly things to do with finance, such as sugar and cocoa futures.
Huggins was not required to regularly meet Buffett or anyone else from Blue Chip or Berkshire. However, data were something that Warren looked forward to receiving, so he got sales and other statistics.
But note, his need for data was not so that he could direct Huggins in how to sell more candy or improve the business; he just took an interest in the performance, particularly return on capital employed.
While Buffett did not regularly phone or look over Huggins shoulder, he was available to consult should Higgins need to talk something over. Chuck could phone whenever he liked and Warren would answer, or, if he was unable to do so, phone him back within an hour.
Both sides felt the relationship is more friend and confidant, partner and equal, rather than boss and servant.
Warren never ordered him to do anything, but helped to examine options and consider alternatives. Drawing on his deep and wide knowledge of business successes and failures he might have a few ideas that Huggins had not seen – but he was not insisting, merely asking if the decision-maker, Huggins, might like to consider this or that.
The franchise
See’s never diverged from its chosen path of building a business franchise around quality candy. It didn’t make sense to change the business in any fundamental way, nor to diversify. Candy making and selling is what they know. They are smart enough to realise that stepping outside of their circle of competence would be dumb.
They had a durable competitive advantage. Why dilute managerial effort by doing other things, or by expanding to places where that vital quality reputation is not in the minds of the candy-buying public?
Buffett and Huggins agreed on the need to keep building the franchise (deepening and widening the moat) by never compromising on the quality of the product, using only the best ingredients, with no preservatives; nor compromising on customer service, even if that meant a short term profit hit.
Buffett realises that investors never stop learning. He says he is still learning, even after being taught by Benjamin Graham and decades of experience. The See’s business was a great educator; it rammed home the importance of the affection with which a brand can be held in people’s minds. This can provide a basis for price rises and exceptional returns on capital employed.
This idea led on to even more valuable decisions later: ”It’s one thing to own stock in 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. 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.” (Fortune, 3 September 2012, “The Secrets of See’s Candies”, by Daniel Roberts.)
The price charged
Buffett worked with Huggins to set candy prices annually. He feels it important that a person with a wider perspective and greater financial interest should have input to the pricing process. A manager may be averse to raising prices by much:
“The manager has just one business. His equation tells him that if he prices too low, it’s not that serious. But if he prices too high, he sees himself screwing up the only thing in his life. And no one knows what raising prices will do. For the manager, it’s all Russian roulette. For the chief executive…………………………To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
