May 3, 2008 5:18

The business of boxed chocolate

One thing I meant to tell you about yesterday—before I got seduced by the blueberry martinis and diamond necklaces at Borsheim’s—was my conversation with Brad Kinstler, the CEO of See’s Candies.

In this year’s annual report, Warren Buffett bragged about See’s. Per-capita consumption of boxed chocolates might not exactly be a growth industry, Buffett wrote, but boy does it throw off cash, which can then be invested and used to buy other businesses. When a Berkshire predecessor company bought See’s in 1972, the chocolatier required $8 million of capital to pull in $30 million in sales and $5 million in pre-tax earnings. Today, See’s sells $383 million a year, with pre-tax profits of $82 million—and $40 million of capital required to run the business. Buffett glows that only $32 million has had to be invested since 1972 in order to reach a total of $1.35 billion in pre-tax earnings.

See’s, which has stores in 10 Western states but opens up temporary outposts in more then 30 states between Thanksgiving and Christmas (when the company does half its sales), raised prices on January 1. That’s pretty much a January 1 tradition at See’s. This year, the cost of a pound of chocolates went from $14.50 to $15.00. Yet even while consistently exercising its pricing power, See’s still generally sells chocolates for at least $5 per pound less than the quality-chocolate companies it considers to be its competitors.

Why? Kinstler says they simply make good chocolate less expensively. Part of that comes from vertical integration; by directly controlling production at its three California factories, See’s can more acutely react to changes in demand. See’s also doesn’t spend a whole lot of money on product development or marketing. The product line doesn’t vary much from year to year—“We don’t feel the need to re-invent ourselves,” says Kinstler—and the design of the black-and-white boxes that traditional See’s assortments come in hasn’t changed, or even really been talked about, in a long, long time. “We’re not selling the packaging,” says Kinstler, “we’re selling the chocolate.”

That if-it-ain’t-broke attitude also permeates the company’s growth strategy. See’s will open eight stores this year, a modest increase over its current base of 200. At Christmas, it will open 120 gift centers—those temporary, mall-based outposts—instead of 110 like last year. Kinstler calls this approach “conservative,” but in a retail landscape littered with companies that had a good idea then ruined it by getting as big as they could as fast as they could, you might more simply call it “smart.” It’s also, as I found out, tasty: