217 (17 June 2015)

Welcome to week 217!  The articles below caught my attention this week.  Please note that what are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********).  The links to articles preceded by [SR] require a subscription to be read in their entirety, although complete articles may frequently be found by a title search.

You can find a pdf of this issue, a cumulative pdf for issues 1-208, and a cumulative pdf for issues 209-present at: https://sites.google.com/site/brucedeanlarson/the-invisible-forces.

(11 June 2015): “The Dating Business: Love on the Rocks” (http://www.wsj.com/articles/the-dating-business-love-on-the-rocks-1433980637)

——–“Like bunnies, dating apps have shown a knack for proliferation.  With a young, increasingly busy and mobile audience, the allure of the dating app business is appealing.  And the market is big.”  According to IBISWorld, “Dating sites in the U.S. are expected to make $1.17 billion and dating apps are expected to log $628.8 million this year.”  Still, some investors “have been wary.  They point to a constellation of challenges to growing the next dating app into a billion-dollar company: Although the stigma associated with dating apps is fading, people don’t tend to push their friends to join the latest hit dating app, satisfied customers leave and expanding into other cities essentially requires creating a new marketplace.  Plus, there haven’t been many successful dating startup exits.”

********The range of dating sites is impressive, although not surprising.  I was especially struck by the special nature of most dating sites, i.e., success leads to the loss of a customer.  This seemed unusual to me but upon reflection it is not that unusual.  Surgeons, therapists, and some helping professions seem to be somewhat similar.  In some of these cases, however, although a particular issue is addressed, a professional relationship continues.  This seems to get at some distinctions that may have more general importance.

(12 June 2015): “China Struggles to Shake Up Salt Monopoly” [SR](http://www.wsj.com/articles/china-struggles-to-shake-up-salt-monopoly-1434004201)

——–“Beijing has for years tried to rein in the salt monopoly, a 2,600-year-old government fixture that once helped emperors pay for stretches of the Great Wall.  But longtime traditions die hard.”  State-owned firms dominate “oil, telecommunications and banking enjoy regulatory exclusions, as well as such subsidies as cheap land and easy credit, advantages that hobble competition and often shortchange consumers.”  The “salt monopoly is made up of some 115 companies licensed to produce table salt.  They must sell only to state distribution companies, which buy the salt for about 500 yuan, about $82 a ton—well above production costs—and sell it to supermarkets for as much as 2,000 yuan a ton.”  Some analysts say the monopoly keeps prices artificially high but monopoly defenders point to its contribution to public health.  The monopoly’s salt is iodized, thereby reducing “iodine deficiency, which can cause goiter and stunt growth.”

********This seems more like a public cartel (https://en.wikipedia.org/wiki/Cartel) than a monopoly but there are elements of both at work in the article.  Something that has been in existence, in various forms, for 2,600 years might be said to be entrenched.  Are there other ways to ensure product quality and characteristics other than restricting salt production to a select group?

(12 June 2015): “How Do Companies Quietly Raise Prices?  They Do This” [SR](http://www.wsj.com/articles/how-do-companies-quietly-raise-prices-they-do-this-1434041940)

——–“When spice maker McCormick & Co. started shipping 25% less pepper earlier this year in the same packaging at about the same price, it was engaging in an age-old means of getting frugal consumers to pay more for less.”  The practice is sufficiently common that there are technical terms to describe them.  “Weight-out” refers to “putting less cereal or potato chips into a package.”  For toilet paper, the term for reducing the number of sheets is “de-sheeting.”  There is regulatory terminology, too, in which case the “art of putting less in a package than meets the eye is ‘nonfunctional slack fill.’ . . . with companies squeezed between thrifty shoppers and—in some cases—rising costs, it’s one that could become more familiar.”

********As the article suggests, parallel to “nonfunctional slack fill” is “acceptable slack fill,” i.e., slack fill that is functional and does not get one in trouble.  You can learn more about slack fill and nonfunctional slack fil at: http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfcfr/CFRSearch.cfm?fr=100.100.  This is a recurring issue.  Whenever a particular ingredient of a product becomes more expensive, some producers will want to preserve their profitability by increasing slack fill.  I wonder what percentage of consumers noticed that McCormick’s reduced its product by 25%?  I wouldn’t have been one of them.

(13 June 2015): “The Washington wishing-well” (http://www.economist.com/news/business/21654067-unstoppable-rise-lobbying-american-business-bad-business-itself-washington)

——–“In 1971 Lewis Powell, an American lawyer who would go on to become a Supreme Court judge, wrote a memorandum for the Chamber of Commerce” indicating that there were “few elements of American society that had ‘as little influence in government as the American businessman, the corporation, or even the millions of corporate stockholders.’”  In 2012 things are very different.  In the newly published The Business of America is Lobbying, Lee Drutman of the New America Foundation “demonstrates that in recent years companies have gone from using lobbying simply to protect themselves from politics (by seeing off such things as tax increases and regulations) to using politics to help them become more profitable.”  According to Drutman, there is little hope “that the growth of lobbying can be reversed.  He notes that . . . once companies have made an initial investment in lobbying they almost never give up.  They find that the more they do of it, and the better they get at it, the more they get out of it.”

********Evidently General Electric, in first position, spends $21 million per year on lobbying, which likely understates its overall spending due to people in positions like government relations, public affairs, and corporate communications, and to the existence of trade groups and corporate-sponsored academics.  In a somewhat similar vein, Mark Mizruchi, in The Fracturing of the American Corporate Elite, argues that “whereas companies once lobbied for public goods such as better roads, they are now more inclined to press for company-specific, or at best industry-specific, benefits.”  You can learn more about Drutman’s book at: http://www.amazon.com/Business-America-Lobbying-Corporations-Politicized/dp/0190215518/.  You can learn more about Mizruchi’s book at: http://www.amazon.com/The-Fracturing-American-Corporate-Elite/dp/0674072995/.

(15 June 2015): “Fortune 500: 2015” (http://fortune.com/fortune500/)

********The 2015 Fortune 500 was just released and once again Walmart is at the top of the revenue list with revenues of $486 billion, followed by Exxon Mobil, Chevron, Berkshire Hathaway, and Apple.  At the top of the profits list was Apple, with profits of $40 billion, followed by Exxon Mobil, Wells Fargo, Microsoft, and JP Morgan Chase.  Finally, topping the market value list was Apple, with a market value of $725 billion, followed by Google, Berkshire Hathaway, Exxon Mobil, and Microsoft.  I was a bit surprised by the strong showing of Microsoft.  As always, there is much of interest to be found in the in the list.  One nice feature is the ability to filter the list by a number of criteria: industry, city, state, and sector.  The five largest companies with headquarters in North Carolina are: Bank of America, Lowe’s, Duke Energy, Nucor, and VF.  In light of the article immediately above, it would be interesting to know the level of lobbying expenditures each company made in North Carolina or nationally.  Presumably the “Lobby 500” is something that could be produced with relative ease and would (1) find a ready audience and (2) reflect more fully the role of the invisible foot in our lives.  Sounds like a retirement project!

(15 June 2015): “GDP’s Wicked Spell” (http://chronicle.com/article/GDPs-Wicked-Spell/230881/)

——–“Most important political debates today happen in a bubble defined by a common assumption: Economic growth is good.  More than good, it is essential.  Economic health, success of governments, importance of education, meaning of life, the very idea of progress—you name it, pundits from right to left argue inside the bubble.”  The sway of economic growth is built upon the premise that “the more we turn life into commodities . . . the better.  That growth is gauged by one little big number—Gross Domestic Product, or GDP.  Everyone has heard of GDP, few know its origins, fewer still what it entails, or how it fundamentally shapes our lives.”  With its origin in the Great Depression, GDP helped provide a sense of what was going on that had been previously missing.  Today, however, “there is another stark reality: Growth built on depletion, obsolescence, inequality, and waste can produce more poverty than it alleviates.”  New measures of “What are we growing?  And for what purpose?” are needed.  “A few economists are beginning to advocate for maximizing human capacities and freedom in a ‘smart economy,’ not just more throughput.”

********This is a lengthy article by Dirk Philipsen, an economic historian at Duke University, summarizing some of the content of his recently published book: The Little Big Number: How GDP Came to Rule the World and What to Do about It (http://www.amazon.com/Little-Big-Number-World-about/dp/0691166528/).  A history of GDP is of potentially great importance if it provides material, as it appears it does, suggesting how develop better indicators of what we really care about.  It seems like everything is an assessment problem.

********This book, at least the article, seems to be especially well timed.  Two publications come to mind that might connect with Philipsen’s: Naomi Klein’s This Changes Everything: Capitalism vs. the Climate (http://www.amazon.com/This-Changes-Everything-Capitalism-Climate/dp/1451697384/) and Pope Francis’s Laudato Si: On Care for Our Common Home (http://www.amazon.com/gp/product/1612783864).  In looking at these two books, in the latter case reports about it, as well as Philipsen’s, it seems that what capitalism needs is something akin to The General Theory of Employment, Interest, and Money, by John Maynard Keynes.  It is generally accepted among economists that Keynes set out to find a way to rescue capitalism from its failures.  What helped make it attractive to graduate students and professional economists was its introduction of some new ideas and techniques to work with them.  The market failures connected to climate change are well known and seemingly addressable.  Who will tie these materials into a publication that will move the hearts and minds of men and women near and far?

(16 June 2015): “Will the Corona Flow Fast Enough to Meet U.S. Demand?” [SR](http://www.wsj.com/articles/will-the-corona-flow-fast-enough-to-meet-u-s-demand-1434414150)

——–[Nava, Mexico] “Here at the Nava Brewery just over the border from Texas and south of thirsty been country, robotic cranes hoist bottles of Corona Extra into cases a robot stacks onto pallets for pickup by driverless vehicles.”  The facility is owned by Constellation Brands Inc. of New York and it is about to become much larger as 3,000 construction workers are “scrambling to more than double the plant’s size” from its current 8.4 million barrels of  beer.  Constellation was long known as a maker of wines—Robert Mondavi and Clos du Bois—that sold Corona through “a joint venture called Crown Imports LLC.”  But its fortunes changed dramatically for the better when Anheuser-Busch InBev took over Grupo Modelo in 2012.  In order to satisfy regulators, AB InBev had to sell some of its assets and “Constellation was the logical beneficiary. . . . Overnight, Constellation became the U.S.’ third-largest beer company by volume.”  As a result, Constellation’s annual sales have more than doubled from $2.8 billion to $6.03 billion.  The expansion of the brewing capacity in Nava grew out of a requirement of the U.S. Justice Department that Constellation “produce 100% of the beer it sells by June 2016—a difficult task for a company with about 70 years of winemaking experience but none in brewing.”  Later, Constellation expects to expand in California, “which currently accounts for 25% of the company’s volume.”

********In this case, it appears that antitrust enforcement created a windfall for Constellation Brands.  As a result, a company focused on wine now derives 53% of its revenues from beer, and that will likely increase.  According to Bill Hackett, the president of Constellation’s beer division, “The biggest question I got when this [agreement] was announced was: What the hell do you know about brewing beer?”  Fortunately for Constellation, its “purchase “included the 650 [Grupo] Modelo employees operating the Nava Brewery.”  Thus the knowledge of “how to make beer” came with the purchase.  All the same, it is impressive how Constellation was able to shift gears and embrace the opportunity provided.

May you have a good week!

Bruce

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