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Friday, December 2, 2011

Are Companies More Powerful Than Countries?

Lately, many of us are seeing and hearing people comment on how big multi-national companies are simply too powerful. Some are said to have bigger revenues than the Gross Domestic Product (GDP) of some fairly large countries. Recently, I have seen that McDonald’s $24 + billion in sales is larger than the Latvian economy. Exxon Mobil with over $35 billion in revenue is larger than Thailand’s GDP and would be the 30th country in the world were it a sovereign economy. Finally, Wal-Mart with over $42 billion in sales is larger than oil rich Norway and would be the 25th largest economy in the world were it a free standing nation.

Does it really matter? Some say yes; others no. Companies have influence but they do not carry weapons and, other than a handful of security guards, they do not have anything resembling a standing army. One difference is that of leadership—if people in a free society do not like a leader’s positions or policies they can vote him or her out of office. Most CEO’s tend not to be subject to a similar democratic mandate. Yes, they answer to their boards and shareholders but, if they keep earnings and a stream of dividends growing, most can have pretty long tenures on top.

Capital always has and I believe always will move to where it can earn the best return. That is why developing countries often work very hard to make themselves attractive to foreign investment. Money truly talks and many a non-democratic regime has been “told” to establish a more stable government, encourage rule of law and have accounting practices that are transparent and honest. In short, the country should be a place where international businesses can operate and are comfortable doing so.

So, why do big companies continue to get bigger? Is it because they are all sinister? I feel that the power often attributed to them is really not there. Today, we have a globally competitive economy and companies are constantly and ruthlessly pursuing efficiency. As they improve their performance they reward thousands with jobs and benefit stakeholders with higher dividends and eventually rising share prices. This focus on constantly striving for efficiency is significantly different than most governments around the world.

Governments, on the other hand, are often at the mercy of the tyranny of various special interest groups and to keep their political lives intact, many representatives vote the way the special interests want them to lean. Yet, big companies are often largely where they are due to the power of consumers—they got big by listening to customer needs and meeting their wants at a competitive price.

There is no question that corporations have had their way with Washington, DC in recent years. And, the rants of the Occupy Wall Street crowd make a wonderful criticism of “crony capitalism” and institutions that have become too big to fail. If they are too big to fail, then they are simply too big in an authentic free market model.

For a moment, let us look at two huge multi-national companies, not in energy or finance where influence can be outsized, and see how they have grown.

Henri Nestle was a pharmacist in tiny Vevey, Switzerland. In 1867, he came up with an infant formula. With steady even plodding growth it is now the largest food company in the world. After several decades of slow growth, they merged with the Anglo-Swiss Milk Company in 1905. During World War I, they provided canned and powdered milk to troops. After World War I, flush with cash (Switzerland had been neutral), they branched out into chocolate. World War II was rough on business but by then they had invented instant coffee that became wildly popular.

After World War II, they bought British company Crosse and Blackwell. They then added Libby’s, Carnation, Ovaltine, and Dreyer’s Ice Cream. Water became a hot item and they scooped up Perrier, San Pellegrino, Poland Springs and dozens of smaller players. They continue to buy up companies around the globe and now that the west has an aging population, they are looking at “wellness” as a big growth area.

Several years after Henri Nestle got started, Dr. John Pemberton, an Atlanta physician known for selling patent medicines began selling Coca-Cola (Coke) out of his drugstore. Sales were slow for a few decades and several people sold different versions under the same name. A local businessman, Asa Candler, saw big potential in the product and bought out all parties and consolidated all claims on the product, the name, and the now magic formula. Sales took off and they began a slow steady build across the U.S. For years, they fought back competitors who tried to ape the name. They won most of the suits but lost one against an upstart called Pepsi-Cola.

Today, Coke is sold in over 200 countries. Recently, I read an interview with a financial analyst who said that Coke even makes money in Zimbabwe, arguably the world’s greatest economic basket case. How do they do it? I am not sure but one reader of the blog tells me that they probably deliver to retailers in Zimbabwe who pay with an American Express card issued from a foreign country. They get their money instantly and the local retailer then takes responsibility for making money in a country with the highest inflation rate in the world.

I do not own shares in either of these global giants and have no plan to do so. My point is simply that private companies that are focused on growth and efficiency will likely continue to get larger no matter what happens to the American or European economies. They are not as powerful as some alarmists say but many will likely get a lot bigger as many Asian countries and Latin America emerge as economic powerhouses.

As an old acquaintance one said to me, “Conservative investors, you will sleep well.”

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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