Thomas Lee:
Mall troubles threaten foot traffic, but Buffett’s candy hangs on
See’s Candies has a sweet business model that works for now.
Warren Buffett famously said that he does not invest in any company whose business he does not understand.
Which makes See’s Candies the perfect Buffett investment: The South San Francisco company, owned by Buffett’s Berkshire Hathaway Inc., makes and sells premium chocolates. Pure and simple. Case closed.
Except that things are getting a lot more complicated. Nearly half of See’s 240 stores are located in malls, a format suffering from dwindling traffic and the financial stress of anchor tenants like department
stores.
And chocolate is a highly competitive industry. Buffett is 86 years old, which makes some people wonder how the company will fare without its superstar pitchman once he passes away.
See’s has a “good business model today,” said Burt Flickinger, managing director of Strategic Resources Group consulting firm in New York. “But it’s increasingly becoming a broken one.”
Founded in 1921 by Mary See, son Charles and his wife Florence, the company was acquired by Berkshire 45 years ago. Typically, Berkshire buys underperforming, distressed assets, but See’s was a different play.
“See's candy company was the first high-quality business we ever bought,” said Berkshire vice chairman Charlie Munger during a visit to San Francisco in 1996.
See’s fits the mold of a typical Berkshire Hathaway company: solid if unspectacular, with a brand that trades heavily on nostalgia, and also benefits from the charisma of Buffett. At the Berkshire annual meeting in Omaha, Buffett frequently strolls through the exhibit hall, cheerfully munching on See’s chocolates and sipping Cherry Coke. See’s also carries a list of his favorite treats on its website.
The company does not release financial results, but CEO Brad Kinstler tells me See’s annual sales typically grow in the mid-single digits. IBISWorld research firm estimates that See’s generated about $485.3 million in revenue last year, representing 5 percent annualized growth rate over the past 5 years.
The synergies between making and selling chocolate, combined with low coca prices, affords See’s with robust profit margins, IBISWorld says. The firm estimates that See’s controls about 31.4 percent of the specialty chocolate retail market, far ahead of Godiva (18.4 percent) and Lindt & Sprungli (10 percent).
“See’s is a brand with very loyal customers,” Kinstler said. “It takes them back to a different time.”
But nostalgia can only take retailers so far in this turbulent time for brick-and-mortar chains. Kinstler said the rapid rise of online players like Amazon has not directly impacted See’s, since premium chocolate is something people still like to sample in physical stores.
That may be true, but Amazon is hurting See’s in a less obvious way. About 45 percent of See’s locations are in indoor malls, which have been struggling, in large part due to the growing popularity of e-commerce.
Typically, specialized mall shops like See’s rely on traffic generated by big department store anchors. But chains like Sears, Macy’s, and J.C. Penney have been closing stores in recent years. Without those locations, fewer people visit the mall, and fewer people walk through the doors of shops like See’s.
Flickinger estimates that the loss of an anchor department store reduces customer counts at adjacent mall shops by 10 to 15 percent.
Kinstler insists that See’s draws its own traffic, independent of the mall anchors. But he does acknowledge that the struggles of malls pose potential problems for his company.
“It’s a tough time to operate a business inside a mall,” Kinstler said. “It will take a while before we know what indoor malls look like in the future.”
In the meantime, See’s is increasingly exploring other locations, including outdoor malls and stand-alone locations in higher density neighborhoods. The company typically opens six to 10 stores, each about 1,100 square feet, a year.
Carol Spieckerman, president of Speickerman Retail consulting firm, says See’s will need to get more creative. The company should explore kiosks and pop up stores, she said.
For See’s to think that people will visit a mall just to patronize its stores amounts to “wishful thinking,” Spieckerman said. “They can’t help but be hurt by declining traffic at the mall.”
E-commerce only accounts for less than 10 percent of the company’s overall sales. See’s is making sensible moves by distributing chocolate through Amazon and allowing customers to customize chocolates and assortments via its website, she said.
“That’s about the best they can do,” Spieckerman said. “See’s is a one dimensional play, but they work it well.”
See’s does have a powerful spokesman in Buffett. But what happens to the candy maker after Buffett leaves the scene, as Flickinger said?
The company does not spend a lot on advertising and marketing, relying instead on the star power of the famed investor, he said.
So as See’s plots its way forward, the company will need to find new ways to reach customers beyond its two best marketing vehicles: its physical stores and Buffett himself.
Thomas Lee is a San Francisco Chronicle columnist. Email: tlee@ sfchronicle.com Twitter: @ByTomLee