Blue Chip Stamps
Company Overview
Blue Chip Stamps was a trading stamp company — retailers gave customers stamps for purchases, which customers collected in books and redeemed for merchandise — that Berkshire and Munger's partnership structures acquired control of in the early 1970s. The company proved to be a critical early vehicle for Buffett and Munger's joint capital allocation, funding several of Berkshire's most important early acquisitions.
Investment Story
The trading stamp model. Blue Chip collected fees from retailers who issued the stamps, then provided merchandise to customers who redeemed them. The business model generated float: the time gap between stamp issuance and merchandise redemption gave Blue Chip investable capital. Some stamps were never redeemed — representing essentially free capital.
Munger and Buffett accumulate control. Through their various partnership structures, Buffett and Munger accumulated controlling interests in Blue Chip Stamps in the early 1970s. The California-based company became their primary joint investment vehicle outside of Berkshire proper.
Blue Chip funds transformational acquisitions. Using Blue Chip's float and operating earnings, Buffett and Munger made three acquisitions that proved transformational: See's Candies (1972, $25 million), the Buffalo Evening News (1977, $32.5 million), and Wesco Financial Corporation (1973 initial, with subsequent increases). Each of these proved to be outstanding investments.
Regulatory scrutiny and eventual merger. Blue Chip faced regulatory scrutiny in California related to its market position as the dominant trading stamp company. Eventually, the company was merged into Berkshire Hathaway in 1983, with Berkshire issuing stock to acquire the shares of Blue Chip it didn't already own. The merger simplified Berkshire's corporate structure.
Secular decline. The trading stamp business itself was already in secular decline — consumers and retailers were moving away from stamp programs toward direct price competition. The business shrank steadily through the 1970s and 1980s, but its float and earnings provided critical capital for the three investments that made Berkshire's early history.
Buffett's Own Words
*Blue Chip Stamps. Blue Chip Stamps Our holdings of stock in Blue Chip Stamps at year-end amounted to approximately 19% of that company's outstanding shares. Since year-end, we have increased our holdings so that they now represent approximately 22½ %; implementation of the proposed merger with Diversified Retailing Company, Inc. would increase this figure to about 38½ %. Our equity in earnings of Blue Chip Stamps became significant for the first time in 1973, and posed an accounting question as to just what *
In the opinion of management, its most important asset is 16% of the stock of Blue Chip Stamps. Blue Chip Stamps Our holdings of stock in Blue Chip Stamps at year-end amounted to approximately 19% of that company’s outstanding shares. Since year-end, we have increased our holdings so that they now represent approximately 22.5%: implementation of the proposed merger with Diversified Retailing Company, Inc. would increase this figure to about 38.5%. Our equity in earnings of Blue Chip Stamps became significant for th
Blue Chip Stamps. During this period we plan to continue to build financial strength and liquidity, preparing for the time when insurance rates become adequate and we can once again aggressively pursue opportunities for growth in this area. Textile Operations During the first nine months of 1974 textile demand was exceptionally strong, resulting in very firm prices. However, in the fourth quarter significant weaknesses began to appear, which have continued into 1975. We currently are operating at about one-third of
Blue Chip Stamps resulting from an enlarged ownership interest, and at least a moderate improvement in insurance underwriting results will more than offset other possible negatives to produce greater earnings in 1976. The major variable—and by far the most difficult to predict with any feeling of confidence—is the insurance underwriting result. Present very tentative indications are that underwriting improvement is in prospect. If such improvement is moderate, our overall gain in earnings in 1976 likewise will prov
Blue Chip Stamps During 1976 we increased our interest in Blue Chip Stamps, and by yearend we held about 33% of that company’s outstanding shares. Our interest in Blue Chip Stamps is of growing importance to us. Summary financial reports of Blue Chip Stamps are contained in the footnotes to our attached financial statements. Moreover, shareholders of Berkshire Hathaway Inc. are urged to obtain the current and subsequent annual reports of Blue Chip Stamps by requesting them from Mr. Robert H. Bird, Secretary, Blue C
Investment Lessons
Float economics are not limited to insurance. Blue Chip Stamps' float — unredeemed stamps representing deferred obligations — functioned similarly to insurance float: collected money invested before the corresponding obligation was paid. The observation that float-like economics existed outside insurance informed Buffett's later analysis of various businesses' underlying capital characteristics.
Good managers deployed mediocre business cash flows into excellent businesses. The genius of the Blue Chip era was using the cash generation of a declining trading stamp business to fund acquisitions of See's Candies and the Buffalo News — two businesses with far superior long-term economics. The float from a mediocre business (stamps) funded a great business (See's), which in turn generated float for further acquisitions. This compounding cascade is Berkshire's operating model in miniature.