B000U5KFIC EBOK (26 page)

Generally, I'm not in favor of a social system that throws
huge rewards to people who don't improve the factories,
don't invent better systems, and so forth. Of course, you can
argue that I'm condemning myself. All I can say is it's almost
intentional.

Charlie Munger

HE MUNGER FAMILY MEMBERS WERE having their first dinner together in
the new "great hall" at their Star Island retreat. A cooperative design
effort among the adult children, the communal gathering room had been
generously funded by their father. As the Munger clan had grown, collecting spouses and grandchildren, it was increasingly troublesome to find
one space where everyone could get together for dinner, or to play games,
or to simply sprawl around a fireplace and gab. This lodge room will
do the job. An open-beamed ceiling rises above a massive, fieldstone fireplace. A full-sized pool table at one side of the room already is surrounded
by teenagers. There are two long banqueting tables for grown-ups, and a
small dinner table for the younger children. As happens most evenings,
the teenaged Mungers have decided to dine together-elsewhere-and
have set up their own party on a picnic table near the end of one of the
Munger boat docks. It's cool out over the lake and there are fewer bugs
and no parents.

Back in the lodge room, there are toasts to the new addition, allaround thank yous to the people who collaborated by fax, e-mail, and ordinary telephone to plan this expansive, woodsy room, the small kitchen,
and a second small dining/workroom. A meal of mixed grill, fresh
creamed corn, risotto, and salad is served from a buffet. Ice cream is the
dessert. Most people hold their hands over the top of their wine glasses to keep the insects out, but those who don't are treated to a mouthful of
gnats. No matter. Everyone's chattering and having fun.

Molly Munger, who is seated next to her father, turns to him and quietly thanks him for providing the wherewithal for the family gathering,
and especially for this wonderful great hall. Charlie stares straight ahead,
not responding to her comment, not blinking.

"Did you hear me, Daddy?" Molly asks persistently, quietly. "Yes," he
murmurs, continuing to stare straight ahead.

Suddenly one of the Munger children appears with a box of See's
Candy, taken from a case that had been shipped from the factory in advance of the family's arrival. The guests begin poking around, looking for
their favorite cream center or caramel, stopping just short of sticking a
finger in to see what the filling might be. The Mungers and their guests
are too polite for that, but some are tempted. Nancy Munger speaks to her
husband from the opposite end of the table, "Charlie," she calls. "Charlie!
He never listens to me," Nancy complains to her dinner partner. "Charlie,
Charlie," she calls louder. "Tell the story about the pipes." She gets his
attention. "The pipes at the See's factory."

Now he's online and proceeds to recount an episode when See's
hired a new employee experienced in candy-making and took him to
review the kitchen where the candy is cooked. "The employee spent
some time looking around, then puzzled, asked a manager where the
water pipes were. The guy could only find two pipes, one marked `cream'
and the other marked `whipping cream.' He was amazed to learn that
they don't use any water when making See's, so there were no water
pipes."

WHEN SEE'S CANDY (:ELEBRATED ITS SEVENTY-FIFTH anniversary at a luncheon
in Los Angeles, the crowd had surprise visitors. A man in a white jumpsuit, wearing goggles and an antique leather helmet, drove onto the stage
astride See's 1920's trademark black-and-white, restored Harley Davidson
motorcycle with its matching delivery sidecar. The driver hopped off the
motorcycle, flung off his hat, and ripped off the jumpsuit. At the same
time, a figure rolled out of the back door of the sidecar. There, before a
laughing audience stood the driver, Warren Buffett, and his passenger,
Charlie Munger.

"I particularly enjoyed coming here today," Munger told the assembled employees, suppliers, and customers. "It gave me the chance to
look a lot spryer than I really am. If you coil a guy up like a spring and put him in a narrow receptacle, he will pop out like a kid. While I was
in that receptacle, I thought of my favorite business analogy-the mouse
who says `let me out of the trap, I've decided I don't want the cheese.'
There are a million business traps. You can get sloppy, you can get alcoholic, you can get megalomania, you can not understand your own limitations. There are a million ways to gum it up. To survive and prosper as
long as this company has-started by a woman who was 71 [years old],
that I really like. And it's an amazing example. See's has stayed out of a
lot of traps."

"The ordinary candy company puts in too many stores," Charlie continued. "You have this huge overhead you're carrying through July and
August, and you just can't get well at Christmas. But See's has always had
the discipline of knowing their own business. That's harder on the employees, by the way. They have this huge crunch in the stores at Christmas, but it's part of the secret of See's.

"And of course the fanaticism about the quality of the product and
service is the heart and soul of the business. I love the fact that this
room is full of long time customers and long time suppliers. You get suppliers who are good and who are trusted because they deserve trust, and
you behave the same way toward your own customer, then you are a little part of a civilization that is a seamless web of deserved trust. This is
the way the world ought to work. It is a better example for everyone
else. It is the right way to build up a state or a civilization. It was just
marvelous for us to become associated relatively early in our business
careers with a culture that was so fundamentally sound. It is Ben
Franklin (or his business philosophy) all over again, alive and well at
See's after all these years."'

Summer is the slowest season for candy-makers, since there are no
candy-centric holidays. At the La Cienega Boulevard factory in Los Angeles, the summer staff shrinks to around 110. During the Christmas to
Easter season, the staff swells to 275 or more.

The summer candy-makers are the long-termers, the lifers, and many
are Hispanic. See's prides itself on a sense of family that allows mother,
daughter and granddaughter, husbands and wives, brothers and sisters, to
work side by side. The southern plant makes about 40 percent of the
candy, concentrating most on those with hard centers. The remaining
sweets are made in the South San Francisco plant. Factory workers are
paid hourly wages and receive full health benefits as negotiated by their
union, the Bakery and Confectionary Workers Union. Hundreds of See's
workers have been with the company 15 years or more. At the Los Angeles factory's 1999 awards banquet, 21 workers v%i re rcco~gl,ized for service
ranging from 30 to 50 years.'

See's Candy-with its motto "quality without (,nni!)romise"-repre-
sents more to Munger than an after-dinner dclicacv. The acquisition of
See's Candy was among the earliest deals that he at,-1 Warren Buffett did
together and it was one of the first companies zh; } purchased outright.
But most important, the experience of See's taught Charlie and Warren a
lesson that caused a major improvement to their investment style.

In 1972. using the float of Blue Chip Stamps, Buffett and Munger acquired the small Los Angeles-based See's Candy for $25 million. It was a
major step for Charlie and Warren because it was their biggest purchase
up to that time.

It was big news in California, where See's black-and-white candy
shops arc part of the local culture. A 16-year-old Cher was working at
See's when she met Sonny Bono and left her job to move in with him as
his housekeeper.

Mary See was 71 when she opened a small, Los Angeles neighborhood candy shop in 1921, although she had the help of her son Charles.]

Charles A. See had been a pharmacist in Canada, but changed careers
after his two pharmacies were destroyed when a forest fire swept
through the town where he did business. He took up work as a chocolate
salesman and dreamed of starting his own candy company, using recipes
developed by his mother. In 1921, he moved his family, including his widowed mother, Mary, from Canada to Pasadena, the beautiful and refined
Los Angeles suburb that Charlie would later adopt as home. During the
1920s, Los Angeles was a booming city of 500,000 residents. It wasn't an
easy go for the Sees, since there were hundreds of competitors. See and
his partner, James W. Reed, decided to concentrate on building a reputation with a high-quality product.

When the stock market crashed in 1929 and the Great Depression
hit, See was forced to cut the price of a pound of candy from 80 cents to
50 cents. He survived by persuading landlords to reduce his rents, arguing that lower rent was better than no rent. But he also saw an opportunity to expand his markets as other candy-makers went bankrupt. A
second crisis came during World War II when sugar was severely rationed. Rather than compromise quality with inferior ingredients or altered recipes, See's decided to produce as much high quality candy as
possible with the ingredients that were allocated to the company, and no
more. Customers lined up around the block to buy the limited supply of
chocolates, and once the supply was gone, the shop closed for the day. No
matter what time the store closed, the sales staff was paid for a full day of work. This turned out to be a smart marketing ploy, since the waiting
crowds added to the candy stores cache.

See's was already 30 years old when Charles Huggins joined the company in 1951. The head office was then in Los Angeles, but Huggins
started in the San Francisco facility.

Huggins first saw San Francisco when he took furlough before going
to Europe as a paratrooper in 1943. Huggins fell in love with the area. "I
said, if I make it through the war, this is where I want to be." He made it,
then enrolled in Kenyon College. After graduation, Huggins moved to San
Francisco, where, after getting a referral from Stanford University's placement office, he went to work at See's.

He was sent around to work in all the departments and even to make
candy. Huggins first big opportunity came when managing the packaging
department, where employees thought they were doing things wrong, but
couldn't get anyone to listen. Huggins went in, took the workers' advice,
and made changes that improved the process. Little by little he was given
more responsibility.

When Harry See, Mary's grandson, took over the company after his
brother's death, Huggins was given responsibility for expanding the company's business. Harry See, Huggins said, "enjoyed life tremendously, was
a world traveler, established vineyards in Napa Valley. After a while the
family decided collectively to sell the company and cash in their chips. I
was coordinator and liaison for that.

"We started in the spring of 1970. We had a couple of very serious
suitors, such as a big-four sugar company from Hawaii that owned C&H
and others. The family wanted a pretty heady ransom for the company
and that dissuaded several buyers."

One company began an in-depth due diligence, examining the business, its many contracts, and so on, to the extent that even Huggins
thought they were overly meticulous. "At the eleventh hour, literally at
midnight the day before they were to sign the purchase agreement, they
backed out. No harm was done, except the energy I expended. We've
even kept in touch for years, they were such nice fellows," said Huggins.

About that time, Robert Flaherty, an investment adviser to Blue Chip,
heard that the premier chocolate chain was for sale. He contacted
William Ramsey, a Blue Chip executive, who was enthusiastic about buying See's. Ramsey call Buffett from Flaherty's office.

"Gee, Bob," Buffett said. "The candy business. I don't think we want
to be in the candy business."4

For some reason, the phone line then went dead. Ramsey and
Flaherty hurriedly tried to call Buffett back. Finally, after the secretary misdialed the number and several minutes elapsed, they reconnected. Before they could speak, Buffett burst out: "I was taking a look at the numbers. Yeah, I'd be willing to buy See's at a price."'