The 10 Companies That Feed The World

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Oxfam, the charity, has an interesting graphic (above) that shows the 10 most powerful food manufacturers in the world.  

At least in the developed world, where most things people eat are plucked/cleaned or made/assembled, packaged and distributed, they illustrate how 80% – or more – of what the average person eats every day touches one of these 10 companies’ global supply chains.  And it shows you what kind of massive economies of scale are at play in the packaged food industry. 

A secondary takeaway, at least to me, is that because many of these companies compete in the same categories and sub-categories on our grocery store shelves with mostly undifferentiated products, branding and marketing is how they grab market share from each other. Which is of course why these 10 companies are also generally acknowledged to THE gurus of consumer marketing. 

Amazon Is Under The P&G Tent – Your Move, Competitors

You have to hand it to Amazon for another bold, unconventional strategy that it has quietly been executing on, as Serena Ng writes on The WSJ:

P&G began sharing warehouse space with Amazon around three years ago and has expanded the practice. Amazon is now inside at least seven P&G distribution centers world-wide, including spots in Japan and Germany, said a person familiar with the matter.

The economics of the arrangement benefit both sides. For Amazon, co-location reduces the cost of storing bulky items like diapers and toilet paper and frees up space for the Web retailer to stock higher-margin goods in its own distribution centers. The location in northeastern Pennsylvania is 5 miles from one of P&G’s largest plants, which makes diapers, paper towels and toilet paper, and within a day’s drive of major cities in the U.S. Northeast and Canada. The warehouse also stocks other P&G products from pet food to razors to shampoo.

P&G, meanwhile, saves on the transportation costs that it would have incurred trucking products to Amazon’s regional distribution centers. Plus, it gets Amazon’s help in boosting online sales, a priority for many in the industry.

And if some of the resulting savings get passed along to consumers, that’s yet another reason for them to stick to Amazon (and not drive to, say, Wal-Mart). In other words, this cozy arrangement has all the markings of a win-win-win.

But what about the competition? Wal-Mart, Target, Costco and large regional and national grocery chains – doesn’t this put them at a disadvantage? Or does Amazon’s scale and ambition mean that P&G can afford to give it slightly more preferential treatment?

The interesting thing here is that, as Ms Ng writes, this arrangement is not limited to P&G:

Amazon is already inside or in talks to enter the warehouses of companies including Seventh Generation Inc., Kimberly Clark Corp. and Georgia Pacific Corp., people familiar with the matter said. 

Seventh Generation said it is in talks with Amazon to ship its diapers, baby wipes and cleaning products directly from its warehouses. Chief Executive John Replogle said more than 20% of the Burlington, Vt., company’s sales come via the Internet—a percent that has doubled from five years ago, he said. 

“This is the fastest-growing part of our business,” Mr. Replogle said. 

Kimberly Clark and Georgia Pacific declined to comment.

Very, very curious to see what, if any, countermoves (promoting their store brands? Giving P&G a slightly cold shoulder? A warmer embrace for non-co-warehoused suppliers?) Amazon’s competitors will make. 

American and US Air – Not Destined To Be Together?

After United+Continental and Southwest+AirTran – not to mention Delta+Northwest – everyone thought American+US Air was a fait accompli (because mergers are a solution to the airline industry’s historic “wretchedness problem“). 

No, said the DOJ today and filed a lawsuit to block it. 

Interestingly, according to an NYT article, it cited those past mergers as the reason why it thought this one, which would have created the world’s largest airline, shouldn’t be allowed. Those transactions, it contends,  led to higher prices and fewer choices for air travelers – something it says it can’t allow yet again.

And according to a blog post on The WSJ’s CFO section, not only is the DOJ not bluffing, but its case might be built on some pretty damning evidence:

Experts in antitrust law tell Reuters that the Justice Department lawsuit signals a sincere intention to block the deal, not just a negotiating ploy to get concessions before possible approval. Jonathan Lewis, an antitrust lawyer in Washington, called the suit “very powerful” because it quotes company documents and executives anticipating higher prices through consolidation. “If there were going to be a settlement, it probably would have happened already.”

As the WSJ points out, the Justice Department built its lawsuit largely on company executives’ own past comments. The 56-page court submission is full of remarks company officials allegedly made in settings from industry conferences to internal publications, the Journal says. The lawsuit quotes US Airways President Scott Kirby as saying that industry consolidation has allowed airlines to increase fares and charge fees for services like checked baggage. And the department said a US Airways presentation last summer observed that fewer airline competitors had allowed the industry to “reap the benefits.”

But what about the financial health of these airlines should they stay separate?

American, for one, will take a hit – though not a fatal one, says this excerpt from another WSJ article

A scuttled merger would prolong AMR’s stay in Chapter 11, perhaps until late 2014, said another person close to the process. The company would have to fashion a new reorganization plan to emerge from court protection as an independent company, revise its financial projections and negotiate anew with bondholders, unions and other creditors—all of which would take considerable time.

As for US Air, it’s stock took a 13% hit following the news, as was to be expected.

But very interestingly, other airlines’ stocks suffered too because a resurgent US Air might actually do things that are detrimental to the industry:

Investors worried that if American were forced to remain independent, it might try to bulk up to the size of merged behemoths Delta Air Lines Inc. and United Continental Holdings Inc. That could cause industry capacity to grow and earnings prospects to diminish, according to J.P. Morgan Chase & Co.

For now, both airlines are putting up a brave face, vowing to fight the DOJ and promising to complete the merger before the year.

Who’s going to prevail? My money is on the DOJ.

Who (Quietly!) Dominates The US Hearing Aid Market?

Surprisingly, Costco.

As Kyle Stock wrote in Businessweek recently, 

Cornering a high-tech, health-care market seems like an anomaly for a business built on 5-pound bags of gummy bears. After all, Costco doesn’t have to carefully customize to each buyer of its toilet paper or vats of moisturizer. But shelves full of cheap, generic stuff is precisely what gave it a leg up in the hearing-aid business.

The average person who needs a hearing aid waits about seven years before actually getting one, according to Chavez. As their hearing degrades, they gradually get used to it. And then there is the sticker shock: Aids generally costs thousands of dollars and often aren’t covered by insurance. In other words, potential hearing-aid customers aren’t inclined to make a trip to their local audiologist. But a lot of them are going to Costco already, where all they have to do is walk by the sound booth.

This all became clear to Chavez about 10 years ago. “I remember thinking, We have a lot of traffic, and we don’t have to advertise,” Chavez says. “It was one of those classic little business moments, where you see the opportunity right in front of you.”

From there it was a matter of Costco bringing its economies of scale to bear—approaching a high-tech, highly customized product the same way it does frozen shrimp and fruit roll-ups. It tapped the industry’s main manufacturers to source a line of in-house, Kirkland brand hearing aids, which start at around $500 each. It lured skilled audiologists with nice benefits and pay packages, and it began opening hearing-aid centers like crazy.

In the past 10 years, the number of Costco stores with hearing booths quadrupled to almost 500.

The reason I liked this neat little story is because it illustrates how businesses can nicely open up new streams of revenue (and profits) by making use of their existing assets (distribution/reach, foot traffic, economies of scale and the well-regarded-by-consumers Kirkland brand) – and in the process shake up a somewhat mature industry. 

And of course, it’s good to know where I can go in a few (maybe more?) decades for a good deal. 

How To Compete With Amazon – From Bonobos’ Founder-CEO, Andy Dunn

Every once in a while you run into an article or a post online that is deeply insightful and is just perfect in different ways. One such thing that I just read is called “E-Commerce is a Bear“. Andy Dunn, Bonobos’ Founder-CEO wrote it.

The problem with such articles though is that you just don’t know what to excerpt…Naturally, having said that, a couple of excerpts for those in a rush:

1. Amazon’s Competitors – The Track Record:

Only two start-ups have properly challenged Amazon over the past decade: Zappos and Diapers. Amazon, shrewdly, acquired them both. Both companies faced long roads to generating profits in the ferocious low-cost game of competing with Amazon, and both decided if you can’t beat ‘em, join ‘em.

Having spent time with Tony Hsieh and Alfred Lin, the leadership duo who built Zappos, and Marc Lore and Vinit Bharara, the founders of Diapers, I can tell you: these are intense competitors who recognized the best outcome was to join forces with the industry leader.

So if Amazon is the low cost winner of selling brands online, if they are acquiring their best competitors, and if their everyday low prices are available to the entire country via a mechanical turk algorithm which is guaranteed to beat you, how do you compete?

2. Four Strategies To Compete With Amazon

…four strategies in the marketplace to deal with Amazon’s incumbency: proprietary pricing, proprietary selection, proprietary experience, and proprietary merchandise.

(You really MUST read the full article to find out more…Andy helpfully provides examples of upstarts and players in eCommerce that are successfully executing on each of those.)

3. There is little to no EBITDA in eCommerce. Even for Zappos:

Zappos is often given as an example of why e-commerce is awesome. Zappos was awesome for consumers. From what I’ve heard, and I can’t confirm this, at the time of the sale Zappos was generating about $10 million of EBITDA on $1 billion of gross revenue. Assume net revenues were in the $650 million range (~35% return rate), and you have 2% EBITDA margins.

The sale of Zappos to Amazon happened because it had to: it wasn’t a company that was generating enough EBITDA margin to be a viable public company. It didn’t have to happen right then or to Amazon as the buyer, but barring a radical change to the financial reality of that business, it had to happen.

Go ahead. Block off 10m of your time and read the whole thing. Totally worth it. 

Why Firing Andrew Mason Is Meaningless for Groupon


Groupon’s co-founder, Andrew Mason, was fired by its board today after another spectacularly unsettling earnings miss

Some of the snarkier comments on Twitter allude to the 19% voting stock he still controls and the $230m his stock is now worth.

But for entrepreneurs, I am going to guess that regardless of the riches, being ousted from their own creation has to be somewhat painful. But to Andrew’s credit, he seems to have handled it with finesse, with his farewell email (now famous) saying:

From controversial metrics in our S1 to our material weakness to two quarters of missing our own expectations and a stock price that’s hovering around one quarter of our listing price, the events of the last year and a half speak for themselves. As CEO, I am accountable.

Moving beyond that though, this entire episode is meaningless.

The people that are temporarily taking over for the CEO are on Groupon’s board. So how are they off the hook for Groupon’s dismal stock performance and constant post-IPO slide? Andrew’s removal from the board seems merely a signal to the outside world that they mean business. 

At a very fundamental level, the business model – the “daily deal business” – has problems, especially for large players. But it is not flawed, as some has alleged (are you listening, Matt Yglesias?).

Restaurants and “service/experience” offerers around the country will always have excess “inventory” and daily deal sites will always do business. But the problem is that there are no “economies of scale” in this business, there are no barriers to entry and maximizing “lifetime customer value” – very important to small local businesses – is far from assured. 

More specifically,

(a) Anyone can easily get into this business and as long as they have enough foot-soldiers to violate “no solicitation” notices and people to work the phones, they can sign up any number of local businesses.

Local – because meals and services are always consumed by those that are local to each area. As your Inboxes can attest to, anyone and everyone has jumped into this business. 

(b) What can a company that is national or international do in this business that a business that knows a particular area very, very well, can’t?

(c ) Once a restaurant signs up with Groupon, anecdotal evidence suggests that the half-off coupons attract bargain hunters who don’t come back to the restaurant without another Groupon.

So “good” restaurants and other experience peddlers are not really cultivating a clientele via Groupon, thereby reducing Groupon’s attractiveness. This, in turn, means that Groupon is merely helping sell unsold inventory…but if any company can do that, why should that business use Groupon again and again? So if Groupon has to secure each deal afresh – that’s certainly not helping its operating expenses. 

So Andrew Mason’s ousting and his candid letter to Groupon employees will attract some media buzz for a couple of days. After the buzz dies down though, nothing would have really changed.

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