Even with this special item added in, our total dividends
from GEICO in 1983 were considerably less than our share of
GEICO’s earnings. Thus it is perfectly appropriate, from both an
accounting and economic standpoint, to include the redemption
proceeds in our reported earnings. It is because the item is
large and unusual that we call your attention to it.
The table showing you our sources of earnings includes
dividends from those non-controlled companies whose marketable
equity securities we own. But the table does not include
earnings those companies have retained that are applicable to our
ownership. In aggregate and over time we expect those
undistributed earnings to be reflected in market prices and to
increase our intrinsic business value on a dollar-for-dollar
basis, just as if those earnings had been under our control and
reported as part of our profits. That does not mean we expect
all of our holdings to behave uniformly; some will disappoint us,
others will deliver pleasant surprises. To date our experience
has been better than we originally anticipated, In aggregate, we
have received far more than a dollar of market value gain for
every dollar of earnings retained.
The following table shows our 1983 yearend net holdings in
marketable equities. All numbers represent 100% of Berkshire’s
holdings, and 80% of Wesco’s holdings. The portion attributable
to minority shareholders of Wesco has been excluded.
No. of Shares Cost Market
------------- ---------- ----------
(000s omitted)
690,975 Affiliated Publications, Inc. .... $ 3,516 $ 26,603
4,451,544 General Foods Corporation(a) ..... 163,786 228,698
6,850,000 GEICO Corporation ................ 47,138 398,156
2,379,200 Handy & Harman ................... 27,318 42,231
636,310 Interpublic Group of Companies, Inc. 4,056 33,088
197,200 Media General .................... 3,191 11,191
250,400 Ogilvy & Mather International .... 2,580 12,833
5,618,661 R. J. Reynolds Industries, Inc.(a) 268,918 314,334
901,788 Time, Inc. ....................... 27,732 56,860
1,868,600 The Washington Post Company ...... 10,628 136,875
---------- ----------
$558,863 $1,287,869
All Other Common Stockholdings ... 7,485 18,044
---------- ----------
Total Common Stocks .............. $566,348 $1,305,913
========== ==========
(a) WESCO owns shares in these companies.
Based upon present holdings and present dividend rates -
excluding any special items such as the GEICO proportional
redemption last year - we would expect reported dividends from
this group to be approximately $39 million in 1984. We can also
make a very rough guess about the earnings this group will retain
that will be attributable to our ownership: these may total about
$65 million for the year. These retained earnings could well
have no immediate effect on market prices of the securities.
Over time, however, we feel they will have real meaning.
In addition to the figures already supplied, information
regarding the businesses we control appears in Management’s
Discussion on pages 40-44. The most significant of these are
Buffalo Evening News, See’s, and the Insurance Group, to which we
will give some special attention here.
Buffalo Evening News
First, a clarification: our corporate name is Buffalo
Evening News, Inc. but the name of the newspaper, since we began
a morning edition a little over a year ago, is Buffalo News.
In 1983 the News somewhat exceeded its targeted profit
margin of 10% after tax. Two factors were responsible: (1) a
state income tax cost that was subnormal because of a large loss
carry-forward, now fully utilized, and (2) a large drop in the
per-ton cost of newsprint (an unanticipated fluke that will be
reversed in 1984).
Although our profit margins in 1983 were about average for
newspapers such as the News, the paper’s performance,
nevertheless, was a significant achievement considering the
economic and retailing environment in Buffalo.
Buffalo has a concentration of heavy industry, a segment of
the economy that was hit particularly hard by the recent
recession and that has lagged the recovery. As Buffalo consumers
have suffered, so also have the paper’s retailing customers.
Their numbers have shrunk over the past few years and many of
those surviving have cut their linage.
Within this environment the News has one exceptional
strength: its acceptance by the public, a matter measured by the
paper’s enetration ratio?- the percentage of households within
the community purchasing the paper each day. Our ratio is
superb: for the six months ended September 30, 1983 the News
stood number one in weekday penetration among the 100 largest
papers in the United States (the ranking is based on city zone?
numbers compiled by the Audit Bureau of Circulations).
In interpreting the standings, it is important to note that
many large cities have two papers, and that in such cases the
penetration of either paper is necessarily lower than if there
were a single paper, as in Buffalo. Nevertheless, the list of
the 100 largest papers includes many that have a city to
themselves. Among these, the News is at the top nationally, far
ahead of many of the country’s best-known dailies.
Among Sunday editions of these same large dailies, the News
ranks number three in penetration - ten to twenty percentage
points ahead of many well-known papers. It was not always this
way in Buffalo. Below we show Sunday circulation in Buffalo in
the years prior to 1977 compared with the present period. In
that earlier period the Sunday paper was the Courier-Express (the
News was not then publishing a Sunday paper). Now, of course, it
is the News.
Average Sunday Circulation
--------------------------
Year Circulation
---- -----------
1970 314,000
1971 306,000
1972 302,000
1973 290,000
1974 278,000
1975 269,000
1976 270,000
1984 (Current) 376,000
We believe a paper’s penetration ratio to be the best
measure of the strength of its franchise. Papers with unusually
high penetration in the geographical area that is of prime
interest to major local retailers, and with relatively little
circulation elsewhere, are exceptionally efficient buys for those
retailers. Low-penetration papers have a far less compelling
message to present to advertisers.
In our opinion, three factors largely account for the
unusual acceptance of the News in the community. Among these,
points 2 and 3 also may explain the popularity of the Sunday News
compared to that of the Sunday Courier-Express when it was the
sole Sunday paper:
(1) The first point has nothing to do with merits of the
News. Both emigration and immigration are relatively
low in Buffalo. A stable population is more interested
and involved in the activities of its community than is
a shifting population - and, as a result, is more
interested in the content of the local daily paper.
Increase the movement in and out of a city and
penetration ratios will fall.
(2) The News has a reputation for editorial quality and
integrity that was honed by our longtime editor, the
legendary Alfred Kirchhofer, and that has been preserved
and extended by Murray Light. This reputation was
enormously important to our success in establishing a
Sunday paper against entrenched competition. And without
a Sunday edition, the News would not have survived in the
long run.
(3) The News lives up to its name - it delivers a very
unusual amount of news. During 1983, our news hole?
(editorial material - not ads) amounted to 50% of the
newspaper’s content (excluding preprinted inserts).
Among papers that dominate their markets and that are of
comparable or larger size, we know of only one whose news
hole percentage exceeds that of the News. Comprehensive
figures are not available, but a sampling indicates an
average percentage in the high 30s. In other words, page
for page, our mix gives readers over 25% more news than
the typical paper. This news-rich mixture is by intent.
Some publishers, pushing for higher profit margins, have
cut their news holes during the past decade. We have
maintained ours and will continue to do so. Properly
written and edited, a full serving of news makes our
paper more valuable to the reader and contributes to our
unusual penetration ratio.
Despite the strength of the News?franchise, gains in ROP
linage (advertising printed within the newspaper pages as
contrasted to preprinted inserts) are going to be very difficult
to achieve. We had an enormous gain in preprints during 1983:
lines rose from 9.3 million to 16.4 million, revenues from $3.6
million to $8.1 million. These gains are consistent with
national trends, but exaggerated in our case by business we
picked up when the Courier-Express closed.
On balance, the shift from ROP to preprints has negative
economic implications for us. Profitability on preprints is less
and the business is more subject to competition from alternative
means of delivery. Furthermore, a reduction in ROP linage means
less absolute space devoted to news (since the news hole
percentage remains constant), thereby reducing the utility of the
paper to the reader.
Stan Lipsey became Publisher of the Buffalo News at midyear
upon the retirement of Henry Urban. Henry never flinched during
the dark days of litigation and losses following our introduction
of the Sunday paper - an introduction whose wisdom was questioned
by many in the newspaper business, including some within our own
building. Henry is admired by the Buffalo business community,
he’s admired by all who worked for him, and he is admired by
Charlie and me. Stan worked with Henry for several years, and
has worked for Berkshire Hathaway since 1969. He has been
personally involved in all nuts-and-bolts aspects of the
newspaper business from editorial to circulation. We couldn’t do
better.
See’s Candy Shops
The financial results at See’s continue to be exceptional.
The business possesses a valuable and solid consumer franchise
and a manager equally valuable and solid.
In recent years See’s has encountered two important
problems, at least one of which is well on its way toward
solution. That problem concerns costs, except those for raw
materials. We have enjoyed a break on raw material costs in
recent years though so, of course, have our competitors. One of
these days we will get a nasty surprise in the opposite
direction. In effect, raw material costs are largely beyond our
control since we will, as a matter of course, buy the finest
ingredients that we can, regardless of changes in their price
levels. We regard product quality as sacred.
But other kinds of costs are more controllable, and it is in
this area that we have had problems. On a per-pound basis, our
costs (not including those for raw materials) have increased in
the last few years at a rate significantly greater than the
increase in the general price level. It is vital to our
competitive position and profit potential that we reverse this
trend.
In recent months much better control over costs has been
attained and we feel certain that our rate of growth in these
costs in 1984 will be below the rate of inflation. This
confidence arises out of our long experience with the managerial
talents of Chuck Huggins. We put Chuck in charge the day we took
over, and his record has been simply extraordinary, as shown by
the following table:
52-53 Week Year Operating Number of Number of
Ended About Sales Profits Pounds of Stores Open
December 31 Revenues After Taxes Candy Sold at Year End
------------------- ------------ ----------- ---------- -----------
1983 (53 weeks) ... $133,531,000 $13,699,000 24,651,000 207
1982 .............. 123,662,000 11,875,000 24,216,000 202
1981 .............. 112,578,000 10,779,000 24,052,000 199
1980 .............. 97,715,000 7,547,000 24,065,000 191
1979 .............. 87,314,000 6,330,000 23,985,000 188
1978 .............. 73,653,000 6,178,000 22,407,000 182
1977 .............. 62,886,000 6,154,000 20,921,000 179
1976 (53 weeks) ... 56,333,000 5,569,000 20,553,000 173
1975 .............. 50,492,000 5,132,000 19,134,000 172
1974 .............. 41,248,000 3,021,000 17,883,000 170
1973 .............. 35,050,000 1,940,000 17,813,000 169
1972 .............. 31,337,000 2,083,000 16,954,000 167
The other problem we face, as the table suggests, is our
recent inability to achieve meaningful gains in pounds sold. The
industry has the same problem. But for many years we
outperformed the industry in this respect and now we are not.
The poundage volume in our retail stores has been virtually
unchanged each year for the past four, despite small increases
every year in the number of shops (and in distribution expense as
well). Of course, dollar volume has increased because we have
raised prices significantly. But we regard the most important
measure of retail trends to be units sold per store rather than
dollar volume. On a same-store basis (counting only shops open
throughout both years) with all figures adjusted to a 52-week
year, poundage was down .8 of 1% during 1983. This small decline
was our best same-store performance since 1979; the cumulative
decline since then has been about 8%. Quantity-order volume,
about 25% of our total, has plateaued in recent years following
very large poundage gains throughout the 1970s.
We are not sure to what extent this flat volume - both in
the retail shop area and the quantity order area - is due to our
pricing policies and to what extent it is due to static industry
volume, the recession, and the extraordinary share of market we
already enjoy in our primary marketing area. Our price increase
for 1984 is much more modest than has been the case in the past
few years, and we hope that next year we can report better volume
