World bank competition


In its July 2003 ranking of world banks, The Banker magazine sees US banks as eating up the competition. In an era of low interest rates, US banks keep increasing their profits and their overall size, while banks from most other countries remain stagnant or even lose money. Note that their conclusions were reached well before the Bank of America and J.P. Morgan acquisitions, which emphasize even more the trends they see.

The magazine runs an annual listing of the top 1000 banks in the world. They rank them in two ways, by total assets and by Tier One capital. Tier One capital, also called core equity, is the common stock, disclosed reserves and retained earnings of bank, in other words, the shareholders' equity available to cover actual or potential losses. Banks that have larger Tier One assets are the strongest financially.

Here are few conclusions from the summary:

• The top 10 US banks account for over 57% of total bank profits of the US banks, as well as 56.9% of Tier One capital (defined below).
• The 210 US banks in the list, which account for only 24% of the capital and just 16% of the total assets, managed to produce 49% of the profits for the world's top 1000 banks.
• Those high profit margins are due, in part, to consolidation, which is eliminating some of the smaller, poorer performers.  Consolidation has been slower in other countries.
• The top 25 banks worldwide control over 33% of Tier One capital and 38% of the assets in the world, a percentage that has grown steadily in recent years.
• Japanese banks keep sliding, thanks to long-term loan problems. German banks are not doing well, either. Most other European banks remain stagnant, with the Royal Bank of Scotland being a strong counter-example.

Note that the declining dollar and the improving world financial situation have certain affected these figures.

                    Top 20 banks by Tier One capital

Bank merger fever: Fear of missing the boat

The recent banking deals involving Bank of America and J.P. Morgan are having widespread repercussions. It seems that the fear of missing out on a merger frenzy is a powerful motivator, even for deal that may not make sense.

European banks are currently worried about being dwarfed by the new American banks, according to a Wall Street Journal article ("J.P. Morgan-Bank One Deal Frustrates European Banks", 1/16/2004). A gap is opening between US banks and their European competitors. The article sees the J.P. Morgan-Bank One deal as changing the landscape, according to analysts quoted.

"This deal redefines the industry," said Gary Parr, deputy chairman of Lazard Freres & Co., who advised Bank One on the acquisition. "Universal banks everywhere face a different, much stronger competitor. The merger is an issue for every other bank in the middle and upper tiers of the market."

With the newly powerful euro, the article points out, you would expect to have European banks buying in to the US. But many European banks are hurting, and few have the confidence and resources to enter the US market. Among the few European banks with current US holdings in the industry are:

• London-based HSBC PLC (#4 in equity and capital worldwide), which in 1999 acquired Republic New York Corp., a private bank ($10 billion) and in 2002, Household international, a bank holding company ($14 billion).
• Royal Bank of Scotland (#7 in equity and capital worldwide), which owns Citizens Bank, acquired in 1988, a major bank in the Northeastern US, and has steadily gobbled up a number of small banks in that region.
• Dutch ABN Amro Holding NV (#22 in equity and capital worldwide) owns Standard Federal Bank in Michigan and LaSalle bank in Chicago, along with asset management and wholesale banking operations

These three banks are the most likely to expand their US holdings.

The WSJ article also points out that US bank Citigroup has been active in Eastern Europe, while J.P. Morgan may soon be ready to eye banks in Europe. Many in the business see an increasing number of transnational and transatlantic banks in the next decade. As with law and accounting services, worldwide banking services are becoming more and more important for serving oligopoly clients.

Southern banks merge

Meanwhile, The South Financial Group which owns Carolina Banks and Mercantile Bank (South Carolina) announced t will acquire CNB National Bank in Florida, hoping to build a new regional power. These are relatively small operations ($10 billion in assets for South Financial, less than $1 billion for CNB). But it is clear that the sense of eat or be eaten is strong, along with the idea of expanding geographical scope. Once again the big bank deals look to provide an impetus for lots of smaller deals, and, in the end, the move will make South Financial an even more tempting takeover target itself.

Industry brief: US phone industry (Part 2, cell phones)

Part I

This week AT&T Wireless, the #3 US cell phone company, put itself up for sale. The company had lost $83 million in the last quarter, and saw its revenues and customer base shrinking after numerous technical problems and heavy competition from its rivals. Investors are lining up to buy the subscriber base from the company.

Last week, Cingular, the #2 cell phone company, made a reported $28 billion cash offer. Other candidates are NTT DoCoMo, the Japanese telephone giant that already has a minority stake in AT&T Wireless; Nextel (the #5 US phone company); German Deutsche Telekom, which already owns T-Mobil, the #6 US cell phone company; and Vodafone, the UK company that owns 45% of #1 Verizon Wireless. Vodafone is reported unhappy being the minority partner in the Verizon Wireless deal, and may sell its stake and exchange it for a competitor. (Vodafone is the #1 cell phone provider in the world.)

Cingular seems to be the front-runner. According to an article on internetnews.com, ("Suitors Flock to AT&T Wireless," 1/21/2004), "Peter Firstbrook, a senior research analyst at the META Group, said there's a good possibility for a three-way merger down the road: between Cingular, AT&T Wireless and T-Mobile, number six on the list of U.S. wireless carriers. All three use global system for mobile communications technology on their networks."

AT&T Wireless was spun off from AT&T  in 2001. Parent AT&T has its own problems, and is a frequent subject of acquisition rumors.

The transaction, and perhaps others to come, is possible because in early 2003, the Federal Communications Commission (FCC) dumped regulations that limited the market share that any company can own in any region.

A Cingular/AT&T Wireless merger may restart the merger process until the industry boils down to two or three competitors. Already, Verizon is frequently rumored to be a likely candidate to acquire Sprint. And smaller, privately-owned, players like ALLTEL and Western Wireless may simply be forced out of the game through price and service competition. With minimal regulatory opposition, the US cell phone industry should be a tight oligopoly within two years.

Another German brewery bought

Danish brewer Carlsberg announced that it would take controlling interest in northern German brewer Holsten-Brauerei AG, with a million dollar plus deal. As the beer market contracts, foreign brewers have been eager to buy in Germany, where there are still a number of independent beer makers. Carlsberg plans to sell off some of Holsten's lesser brands and its mineral water business to help finance the deal.

In the dwindling number of beer giants, Carlsberg has been in a precarious position. Its US sales fall far short of other import brands like Heinken's, Bass, and Beck's, its ventures in Russia are not paying off, and its chief competitors Interbrew, SAB Miller, and Heineken are growing fast. Add to that the fact the German beer market has been losing sales over the last few years, and the purchase may be a big mistake.

That's the opinion expressed in the Wall Street Journal ("Carlsberg to Buy Holsten," 1/21/2004). The article states, "With the purchase of the German brewer, the Danish company would finally join the rest of the industry in overpaying for acquisitions. Even after selling half of Holsten's assets and driving cost and revenue synergies, Carlsberg will struggle to make a decent return."

This is a clearly a case to trying to keep up with the big boys. Carlsberg clearly wants to build up bulk to end up as one of the survivors in the world beer market, which is rapidly contracting. The pressure to get big quick, as with other companies, takes precedence of rational short-term reasoning. Various reports quote Carlsberg as eager to acquire more breweries in Germany, Eastern Europe, and Asia and the company has around $3 billion more to spend on acquisitions.

Recent German beer deals

The great tortilla war

Slotting fees enable oligopolies, since they are the best way to clear shelf space for the big and the drive the small out of business. This can be illustrated even in the niche market of making tortillas. The tortilla industry has a low cost of entry. The materials (flour, water, oil) are inexpensive, and the manufacturing process is simple. Differentiation between products is pretty marginal. And brand identities and loyalties are not particularly strong.

Though tortillas may seem like a small industry, they've actually grown to represent about a third of the US bread market, with around $5 billion in sales. But this rapid growth has not been profitable for the over 250 tortilla makers in the US.

One company dominates the US tortilla market, the Mexican company Gruma. The company. That company sells tortillas through the labels Buena Comida, Guerrero, and Mission, so on many supermarket shelves there appears to be real competition when there is not. It also makes a variety of store brands as well as supplying Taco Bell nationally. It has moved up to 50% of the supermarket sales, and makes over $2 billion a year.

Behind Gruma's ascendancy is slotting fees, according to a lawsuit that was filed by 17 smaller US tortilla makers. The allegations that unfair trade practices, including buying shelf space and paying supermarket chains to exclude competitors.

Unfortunately for the plaintiffs, the suit was dismissed  before going to trial a few weeks ago by a US District Court in Texas. According to an article the Forth Worth Star-Telegram, ("Tortilla Lawsuit Dismissed", 1/7/2004), the judge said "the rival tortilla makers could have used the same tactics -- slotting fees and other financial incentives that have become accepted marketing practices for placement of goods in supermarkets." In other words, that slotting fees, no matter how much companies can use them to crush all competition, are legal.

As the article notes, "If the Gruma suit had succeeded, it could have had ramifications in supermarket retailing beyond the $5.2 billion tortilla market. The widespread use of slotting fees charged by chains for positioning products has become controversial, with some lawmakers demanding a ban on the practice." The decision is a blow to antitrust efforts. It also is a missed opportunity to pry into the secretive world of supermarket slotting fees. The plaintiffs plan to appeal.

Slotting fees and the supermarket strike

The current, long-running California grocery strike, has causes that hinge not on employee pay and benefits, but rather on slotting fees. That's the position of economic reporter Edmond Jacoby in a compelling piece in the North Country Times ("Hidden payments may shape grocery strike outcome", 1/1/2004).

In the first place, slotting fees, those fees demanded by supermarket chains of the their suppliers, he argues, are the way in which the three big grocery chains being struck have been able to hold out against the unions. Safeway, Kroger's and Albertsons, the parent companies of the supermarkets being struck, have had to absorb losses of up to a billion dollars.

But Jacoby sees that the underlying driver in the strike is not just the greedy takebacks (or needed concessions) that the opponents in this strike are claiming. He claims that it is the slotting fees themselves, which have "become as addictive to the supermarkets as a drug." After all, slotting and related promotional fees are generally thought to represent the whole margin of profits for the three supermarket chains, who really just break even on regular operations.

He points out that the FTC has determined that slotting fees make up as much as $9 billion in revenue for industry. Jacoby estimates that these three biggest chains account for well over half of that sum.

The slotting fees end up eventually being paid for by the consumer in higher prices. But one major competitor does not charge slotting fees -- Wal-Mart. Wal-Mart insists on very low prices and passes much of that savings on to the customer, without slotting fees. Wal-Mart is famously stringy toward its unorganized employees, but that's not the major factor in their low prices, though that's what the supermarkets are pretending.

Jacoby argues that the traditional retail model; with its slotting fees, "skews its wholesale purchasing decisions because those purchases are driven by the slotting fees, not by consumer demand for the products." The result is a culture in which the customers is less important than the supplier, a myopia that Wal-Mart can exploit effectively.

In other words, Wal-Mart is winning not primarily because of low salaries and health expenses, but because of abstention from the slotting fees, which make for bad shelf space decisions. Like a crack addict, the big chains are unwilling to give up the slotting fees and compete directly with Wal-Mart.

Instead of changing the way they do business, the big chains want to reduce their costs by their work force with low-cost, low-benefit employees. That way, they can continue to lose business to Wal-Mart, without as rapid an effect on their profit margins. Jacoby sees it as a stopgap, postponing the inevitable, rather than a real solution to the supermarket chains' problems.

Jacoby sees the Big Three chains either becoming more like Wal-Mart, or perishing. And many stores will perish not because of overpaid employees, but "as the result of the inflexibility of existing businesses in adapting to a new set of economic realities." The three chains are looking in the wrong place to protect themselves from the disruption of the Wal-Mart approach.

Oligopoly brief: Cargill

Cargill is a silent giant, even though at over $50 billion in revenue, it's one of the top 20 US companies. It has only a few products that consumers know about, yet it's on of the most powerful oligonomies in the world, especially in the areas of trading and processing agricultural commodities. It sits in the advantageous and low-risk position between farmers and ranchers on one side and food manufacturers and retailers on the other. It has grown rapidly, continues to expand, and is well protected against declines in any single sector or national economy. In fact, like other multinationals, it can play off Brazilian orange growers against Florida ones, US wheat growers against Russian ones, German oilseed farmers against Australians.

Founded as a grain storage company in 1865, Cargill is now the largest private corporation in the US: 85% of the company is owned by the heirs of the founders. It's a leader in a number of markets: the food production and processing, commodity trading, feed production, fertilizer production, and is expanding into other national resources. It steadily adds services from storage to transportation, from finance to venture capital, all focused on the central areas of its expertise.

While Cargill has some presence on retail shelves (with meat and salt products), it is even more important as a buyer, shipper, and processor of materials that are used by other companies.

What follows is a brief description of the areas the company dominates.

Food
Excel Corporation is Cargill best-known interface to consumers. It is the #2 meat processing company in the US, second only to Tyson. The company ships beef and pork to both the grocery market and the food processing industry. Its retail beef brands include SterlingSilver, AngusPride, Certified Angus Beef, Tender Choice, and Excel Ground Beef. Its retail pork brand is Sterling Silver Pork. Excel was bought by Cargill in 1979. It now has divisions in Canada and Australia. Cargill also owns Caprock, a major beef feedlot operation.

Cargill is the #2 turkey processor in the US. Cargill turkey production involves two brands: Honeysuckle White and ShadyBrook Farms. Both package and sell fresh turkey, ready-to-cook turkey-based products (like sausage) and turkey-based deli to grocery stores. In 1998 Cargill acquired Plantation, a Texas-based turkey processor (#11 in the US at the time). It sells turkeys and chickens in the UK and France, using the brand Sun Valley Foods.

Sunny Fresh processed egg products are sold to food manufacturers and food service customers.

Emmpak Foods is another Cargill-owned US meat processing company. One division, Emmber Foods, is a supplier of delicatessen meats. Wis-Pak produces frozen ground beef patties and specialty ready-to-cook foods. Wispak Transport is a trucking company that specializes in bringing Wisconsin products (including Emmpak's own) in refrigerated trucks across the US. Peck Meat Packing is a beef slaughterhouse.

Food Products
Cargill Food Products division processes and sells an amazing variety of food products, generally as supplies to food manufacturers.

One of its biggest operations is its Corn Wet Milling businesses, which produces sweeteners, food and industrial starches, various starch derivatives and wheat proteins. It has plants in the US, Western Europe, Turkey, Poland, and Russia. It is #2 in the world in this area.

Through its French-based Cerestar division (acquired 2002), it produces a wide variety of starch-derived products for the food, paper, chemical, and pharmaceutical industries. Cargill is the #1 company in the obscure but very large and profitable starch industry, with corn syrup, sugar alcohols, and other sweeteners.

Cargill also:

• produces dry corn (maize) products such as grits, corn meal and flour (#2 in the world)
• mills wheat flour in the US, India, Argentina, Brazil and Venezuela and produces pasta in Venezuela (#3 in the world).
• processes and sells malt for brewing, distilling, and food processing.
• processes cocoa through its Cargill Cacau and Gerkens Cocoa divisions. It also supplies chocolate products to the food industry through its Wilbur Chocolate Company.
• makes fruit juice from oranges in Brazil and the US and apples in Chile.
• processes peanuts and hazelnuts.
• makes oil and meal from soybeans, sunflower seed, rapeseed, peanuts, flaxseed, corn, palm, and cottonseed, as well as copra.
• processes soy flour, vegetable protein and flavored soy protein.
• manufactures Diamond Crystal salt products, for both the food industry and retail markets.
• manufacturers citric acid and lysine.

Animal feed
Cargill is the world's #2 supplier of livestock feeds. In 2000, the company purchased Agribrands, a major feed company, and joined it with Cargill Animal Nutrition. They have a total of 178 plants in 26 countries. The Animal Nutrition company has divisions that sell feed for beef, pork, dairy, poultry, and aquaculture operations. Cargo sells consulting services and feeding programs to farmers. They sell salt for animal feed, under the brands Champions Choice. They also sell phosphates for animal consumption.


Heavy industry
In recent years, Cargill has extended its interest into other manufacturing areas, away from the food industry.

North Star Steel a steel minimills in the US. It supplies specialty steels and wire rods, and has a joint venture in rolled steel with Australian BHP Steel. It also ahs an allied steel recycling company. Cargill also owns Steel and Wire service centers that produce semi-finished steel for industry.

Cargill Corn Milling produces industrial starches used in the manufacture of paper and other products. It also produces Ethanol.
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Cargill also sells rock, solar and process-evaporated salt, used for industrial production and also for municipal ice melting. It controls 10% of the world's salt supply.

Cargill mines phosphate and manufactures phosphate fertilizers; it also makes nitrogen fertilizer.

Cargill Industrial Oils & Lubricants offers lubricants and specialty chemicals for paints and coatings, inks, and pharmaceuticals.

Commerce
Cargill is a major merchandiser of a number of commodities, both agricultural and non-agricultural.

It is the #1 seller of grains in the world, followed by Archer Daniels Midland. In 1999, it bought the grain trading operations of its biggest rival, Continental Grain Company, The company now handles around a third of all US grain exports. It owns a variety of grain elevators through both North and South America. It also owns transportation systems for shipping these products. Cargill is a major supporter of genetically modified (GM) grain.

It is also a leading trader in oilseeds and soybeans (40% of US exports).

It is a leading trader of cocoa and cocoa products, with 40% worldwide market share.

Cargill Cotton buys and sells cotton from the US, Mexico, and Africa.

The company is a major trader in the areas of rice, palm and coconut oil, tallow, and sugar.

Cargill's Energy Division and Cargill-Alliant (acquired 2002) deal in crude and refined petroleum products, natural gas and electricity. The company also has risk- and asset-management programs for electrical companies.

Cargill Ferrous International trades products ranging from pig iron to finished steels.

To support its commerce, Cargill has its own transportation fleets, including trucks, railcars, and ships. Its Greenwich Marine division handles shipping and ship brokering. Its Rogers Terminal & Shipping and G&M Stevedoring provides freight handling services in the US. The Cargo Carriers group operates cargo barges in the US.


Support services
Cargill Investor Services is a commodities futures broker.

Cargill Ventures is Cargill's investment company with investments in technology for supply-chain management, food processing, animal husbandry, and materials sciences. In this way, Cargill gets in on the ground floor of innovation in its core industries.

Cargill's biosciences group develops new agricultural products based on the raw materials it processes.

Cargill's Financial Markets group specializes in trade-oriented finance.