Coke, China, and America’s competitiveness crisis
It is a shock to hear Muhtar Kent, chief executive of that quintessentially American company Coca-Cola, suggest that the US is now less friendly to business than China.
But Mr Kent’s comments – “In the west, we’re forgetting what really worked 20 years ago” – echo what I heard two weeks ago at Harvard when I talked to Michael Porter, perhaps the world’s best-known expert on competitiveness.
Kraft demerger déjà vu must worry Cadbury
I can only hope a demerger of Kraft Foods into its snack and US grocery businesses will save consumers from the unholy alliance of Cadbury Dairy Milk chocolate and Philadelphia cream cheese in a single spread, recently heralded by UK tabloid The Sun.
More worrying, however, is the impact of near-constant corporate reorganisation on the underlying businesses – and particularly on Cadbury.
Dunkin’ Donuts is as sweet as Krispy Kreme
The 46 per cent first-day pop in Dunkin’ Donuts shares in its initial public offering in New York made the company look like an internet wonder. It has also brought back memories of the disastrous Krispy Kreme IPO in 2000.
Krispy Kreme, for those who do not recall, was a high-flying stock in the early 2000s before accounting difficulties and mismanagement brought the shares crashing down again. At the time, it was hailed as a solid alternative to internet stocks.
This, for example, was Andy Serwer’s conclusion in Fortune in 2003:
Unless the fat police run riot across this land, Krispy Kreme is here to stay. It isn’t some fly-by-night dot-com. There’s 66 years of history here. It’s a product that people not only love but understand. (Quick, what does InfoSpace do?) The world is always filled with unknowns, never more so than right now. With all that’s wrong out there, sometimes it’s easy to lose focus on the big picture. So take a second and ask yourself: Is the American dream still alive? Is Krispy Kreme for real? Don’t bet against it.
Irene Rosenfeld’s reckless defiance of Warren Buffett
Back to Irene Rosenfeld, who despite her degree in psychology, appears to have upset an awful lot of people with Kraft’s £11.6bn takeover of Cadbury.
Having made herself unpopular in the UK by acquiring the maker of Cadbury’s Dairy Milk and the Curly Wurly, she has alienated Warren Buffett, her biggest shareholder, who regards it as “a bad deal”.
When pressed in a CNBC interview about his views on her, he damned her with faint praise:
“I think Irene has done a good job in operations. I like Irene. I mean, she’s been straightforward with me. We just disagree. She thinks it’s a good deal. I think it’s a bad deal. I think she’s a decent person. She could be a trustee under my will. I just don’t want her making this particular deal.”
Ms Rosenfeld has put herself far out on a limb – Mr Buffett’s objections extend not only to the price she paid but her sale of “a very fine pizza business” to Nestle to raise money.
His calculation of the lack of value for Kraft in the deal is worth reading in full because it gives a good idea of how a true value investor thinks.
“Now they mentioned paying 13 times Ebitda for Cadbury, but they’re paying more than that. For one thing, Ebitda is not the same as earnings. Depreciation is a very real expense. But on top of that, they’ve got a billion-three they’re going to spend of various rearrangements of Cadbury. They’ve got 390 million dollars of deal expenses. They are using their own stock, 260 million shares or something like that, that their own directors say is significantly undervalued. And when they calculate that 13, they’re calculating Kraft at market price, not at what their own directors think the stock is worth. So, the actual multiple, if you look at the value of the Kraft stock, is more like 16 or 17 and they sold earnings at nine times. So, it’s hard to get rich doing that. And I’ve got a lot of doubts about the deal.”
Ouch.
As Mr Buffett says, he is not getting a chance to vote on the deal as a Kraft shareholder, but I cannot think this is the last Ms Rosenfeld will hear of it.
Determination is a good quality, but ignoring the world’s most venerable shareholder is not what I would call wise career tactics.
Irene Rosenfeld needs a soft centre for Cadbury
One can hardly fault Irene Rosenfeld of Kraft for her nerve and tactical sense in what looks like a successful effort to take over Cadbury.
Ms Rosenfeld has yet to demonstrate, however, that she knows how to meld disparate corporate cultures and soothe the bitterness caused by a hostile takeover battle.
If an £11.7bn deal between the US and UK companies is announced on Tuesday, as expected, it will bring to an end an extraordinary battle in which Cadbury made little secret of its distate for Kraft.
From Ms Rosenfeld’s initial blunt approach to Roger Carr, Cadbury’s chairman, to the rebuff she faced from Warren Buffett halfway through, it has been a contentious affair.
I wrote a column defending the UK’s openness to foreign takeovers, and emphasis that a company must allow its shareholders, rather than its management, to decide on bids.
The prospect of Cadbury being taken over, however, has raised many hackles, and even prompted a semi-rebuff from Lord Mandelson, the UK business secretary.
Now Ms Rosenfeld has to avoid the kind of post-acquisition culture clash that has plagued many mergers. She may have a degree in psychology, but she will have to prove it.
A healthy appetite for the right price
My column in the FT this week is on the Cadbury takeover battle:
If British takeover battles were decided on personal chemistry and corporate culture, rather than how much money the shareholders are offered, Kraft’s hostile $16.2bn (€10.8bn, £9.8bn) bid for Cadbury would be doomed.
Having irritated Roger Carr, Cadbury’s chairman, by dropping in for tea and talking about money, Irene Rosenfeld, Kraft’s chief executive, felt the chill of British contempt. Her bid was dismissed as a “derisory” offer from a “low-growth conglomerate”.
The message, couched in terms the Takeover Panel would accept, was clear enough. Just because American soldiers came over here with their Hershey bars in the war and took our women, don’t think an American woman can come back with dollars and take our Dairy Milk.
Takeovers in the UK are not, however, decided by such things. Unlike in the US, where boards can erect barriers to hostile bids under the jurisdiction of Delaware where most large companies are incorporated, money decides. “It is bloody difficult to imagine a board recommending the lower of two offers,” says one City banker.
Please read the rest here and comment below.
When not cutting prices becomes a luxury
My column in the FT on Thursday is about luxury and premium good in the downturn:
The harder they come, the harder they fall, one and all. The decade of decadence, of affordable luxury and premium everything, from expensive spirits to fashion label clothes and first-class air travel, is over.
It was, of course, an illusion to imagine that the business cycle had gone away in historically cyclical industries such as airlines and luxury goods. But the years of expansion carried on long enough, with only a brief interruption in 2001, that a lot of people came to think so.
They have changed their minds. Virgin Atlantic expects to lose money in this financial year. Giancarlo di Risio, chief executive of Versace, is to step down after falling out with the family amid a 13 per cent fall in revenues in the first quarter.
Double-digit falls in demand for luxury and premium goods and services are common in recessions but this hangover is especially sharp. Big airlines suffered a 35 to 40 per cent fall in revenues from international first- and business-class passengers in the year to March.
So what should such industries do when faced with a slump in consumer demand? The textbook answer is to cut costs, curb output and do everything possible to adjust – apart from slashing prices.
“You must accept that you will sell less but the biggest mistake is to cut prices across the board and ruin your brands. People are not refusing to buy because prices are too high, but because they are frightened and are hoarding money,” says Hermann Simon, chairman of Simon-Kucher, a pricing consultancy.
There is logic to what Mr Simon says. Even for non-premium industries it takes three to five years to get consumers to pay the full price again once you have started discounting. As for luxury goods, price-cutting rips apart the industry’s artfully constructed image.
Discounting can exact a terrible price, as the imminent bankruptcy of General Motors shows. The company was the king of cheap finance and price-discounting even in the good times; it was left with thin to non-existent margins, having put its brands through the crusher.
But the reality for many companies (happily for consumers) is that they have no choice. Luxury and premium brands have grown so much – and reached so far into the mass market – that their owners cannot choose from a menu of cutting costs, output or prices. All are required.
You can read the rest here and comment below.
Raise a glass to the recovery in spirits and wine
The dollar is falling and the stock market is rising as investors become more convinced that the financial crisis is easing and that some sort of recovery is underway.
That exuberance is also spreading to imbibers of wine, it seems. Having fallen last year, prices for vintage wine are again rising, according to Hart Davis Hart, a US wine dealer. It was pleased with the results of one auction held in Chicago last weekend:
“We have not seen this level of demand for high end Bordeaux and Burgundy since last September,” said President and CEO Paul Hart. “US buyers were much more aggressive than in recent months. International bidding was also up significantly with China leading the way.”
If this is true – it is a rather small data sample – it provides a contrast with the state of the contemporary art market, as recorded by Felix Salmon.
Maybe the rich are too distraught to look at paintings and are drowning their sorrows instead.
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John Gapper is an associate editor and the chief business commentator of the FT.
He has worked for the FT since 1987, covering labour relations, banking and the media. He is co-author, with Nicholas Denton, of All That Glitters, an account of the collapse of Barings in 1995.
Andrew Hill is an associate editor and the management editor of the FT. He is a former City editor, financial editor, comment and analysis editor, New York bureau chief, foreign news editor and correspondent in Brussels and Milan.
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