Page 94 - The Way to the Top

growing. In 1977, I decided to sell one business and concentrate on
building the other. It was then that I considered my father’s advice about

protection from price erosion. Tootsie Roll had a product loved by children
since it started in 1896, and an old established brand. Listed on the New
York Stock Exchange since 1922, it had a secret process for making both
Tootsie Rolls and Tootsie Pops. The women’s knit-goods business, on the
other hand, operated under the name Hampshire-Designers’, Inc., was on

the American Stock Exchange, and was only partly branded. It had many
strong competitors making similar basic products.

The choice was easy. I sold the knit-goods business and concentrated on
building Tootsie Roll Industries. And it paid off handsomely. Sales grew

from 20 million in 1962 to about 400 million in 2003. Net profits grew
from $750,000 to over $66 million in 2003. By buying low and selling
high in recent years, we were able to reach a high of over 18 percent net
profits on sales, in an industry that averages about 5 percent net profit on

sales.

We did benefit from selling high, but the real skill is in buying low and
keeping expenses down so as to maximize the margin between your selling
price and costs. To do so, it is vital that the CEO shares responsibility with

his purchasing head in all buying of key materials. In both the knit-goods
and the candy company I developed methods to keep our purchases of raw
materials, packaging, and energy as low as possible. One of the techniques
we use to find out how low the vendor will go is to offer a price a little
below the lowest price at which we believe that anyone has purchased the

item. We evaluate the pitch of the vendor’s screams to get a clue as to how
far from bottom we are and then bargain hard to get to the lowest price he
or she will take.

In addition, we will hedge part of our raw materials in the futures

commodity markets when we see prices that are fairly low historically.
Sugar, vegetable oils, corn (for corn syrup), and other agricultural
products have future markets where we can gamble one or two years out to
lock in favorable prices on items we use. Again, we can’t be hogs, seeking

to get the lowest prices ever, because hogs usually get slaughtered. But