1 Buffett Story Nobody Told You That Led to Riches

When you tune into a Warren Buffett Annual Shareholder meeting, you’ll often hear the Oracle of Omaha reference See’s Candies, but few understand why this humble confectionary retailer holds such a special place in Buffett’s heart.

Back when Buffett bought See’s he had grand plans to be the candy mogul of the world. He bought See’s for about $25 million and had high hopes of expanding the fledgling retailer beyond California and to go international.

As stores were opened in other locations, Buffett and Munger were met with failure, time and again. It seemed that the special sauce, whatever ingredient mix led to success in California, simply did not translate to other geographies.

At one point, Buffett figured, rather than grow by increasing location footprint and unit volumes, why not boost prices and see the effects on demand? So he instructed his managers to operate as normal but he would set the pricing and return in a year.

And that one operational change led to a chain of dominoes falling that would ultimately influence Buffett’s investing career in a material way, and there are some key lessons to learn from it.

Key Points

• Warren Buffett purchased See’s Candies for $25 million with plans to expand it internationally. However, attempts to grow beyond California were unsuccessful due to various regional issues.
• Buffett increased See’s prices by 13-14% during low inflation and found that demand remained stable, indicating strong brand loyalty and price insensitivity among consumers.
• The experience with See’s taught Buffett the importance of strong branding and consumer habits, leading to successful investments in scalable brands like Coca-Cola and Apple, which have high customer loyalty and pricing power.

What Buffett Learned From See’s Is Priceless

A year on, Buffett returned after increasing prices by 13-14% at a time when inflation was running closer to 3-4%. Unlike most businesses, See’s Candies didn’t see much impact at all on volumes when prices went up.

That alone told Buffett that See’s was selling to a price insensitive consumer that valued the brand more than the marginal change in price. But there was a problem in that See’s simply couldn’t scale locations. For some it was a matter of the after-taste of chocolate. For others, the consumption of chocolate was limited. For yet others, temperature fluctuations led consumers to buy other items. Whatever the reason, it was clear that See’s would be a monster cash flow generator but not a company that could take over the world.

As time went by, though, Buffett connected the dots and stumbled upon another brand that had all the elements of See’s yet had scale potential too, Coca Cola.

What Buffett learned from See’s was not just the power of branding and what it meant for pricing power but also that consumer habits die hard. When he formed his Coke investment thesis, he realized that few consumers would ever stop drinking Coke whether they were in America or India. The brand had global potential because it resonated with consumers everywhere. All he needed was the right price to buy and when the opportunity came he pounced.

What Is Today’s See’s Candies?

If you connect the dots as Buffett did on both his See’s Candies and Coca Cola investments, they are 3-fold. Buy a strong brand that enjoys pricing power. If that brand sells something that results in consumer habits depending on it daily, the odds are the company will enjoy massive consumer retention and customer lifetime value. And finally, if it’s at a good price, pounce on it.

And back in 2016 that’s exactly what Buffett did with Apple. A strong brand with pricing power producing a product that consumers depended on daily trading at about 15x earnings. He went all in and is already up about 5x on that investment.

Today Apple remains the modern day See’s Candies of Buffett’s portfolio. But the lessons can’t be shunned. If you spot a brand whether Netflix, LuluLemon, or dozens of others that have high customer loyalty and pricing power, then when the price is right, pouncing will likely be highly lucrative.