A French soap opera is about to unfold

The world's richest woman just died. If you didn't know this, please stop focusing on the tweets and turn your attention to more weighty matters of the world.

Liliane Bettencourt passed away four days ago at the age of 94. She was the heiress to the founder of L'Oréal, the world's largest cosmetic company; the only child of Eugène Schueller who founded L'Oréal in 1907. She herself worked in the company from the age of 15 and rose to become its deputy Chairperson.

The future of L'Oréal is now in play. And therein lies a story that could give a beating to any soap opera on television.

In 1974, fearing that France would nationalise the company, Bettencourt did a deal with Nestle wherein she offloaded about half her holding in exchange for shares in Nestle. Since then Nestle and Bettencourt have had one of the longest tangos in business history. Nestle, a food company, with no presence at all in cosmetics, had a 30% stake in the world's largest cosmetics company (now down to 23%). But in an agreement with Bettencourt, Nestle remained a sleeping partner and promised not to acquire any more shares or to bid for Bettencourt's own shares as long as she was alive. Presumably Nestle had thought that she would not live so long. But they kept their word and until now have not interfered at all in the business just pocketing the dividends and biding their time. So much so that very few outside the business world probably even know that Nestle is a major shareholder in L'Oréal.

In the meantime Bettencourt's life over the last decade has been another soap opera all by itself. Sometime in 2007, at the  ripe age of 84, she took a fancy to her photographer and started to bestow gifts to him worth over €1 billion. Her daughter filed a complaint with the police that her photographer was taking advantage of her weakened psychological stake to amass a personal fortune. She and her daughter had an extremely public spat with each accusing the other of having gone mad. The courts finally made Bettencourt's grandson as her overseer and the fortune was vested with her daughter and her two grandsons. But everything was in a state of limbo as long as she was alive.

Cue the events in Nestle. Nestle , for long, has waited patiently to consummate what was really a delayed acquisition. Both the last two Chairmen of Nestle sit on the L'Oréal Board. They were probably waiting for the death of Bettencourt to acquire L'Oréal . But alas they now have an activist shareholder in Dan Loeb who has a fair stake in Nestle and is pushing it to do the opposite - sell the stake in L'Oréal and return the money to shareholders. So there is no saying what Nestle will ultimately do - acquire L'Oréal or divest !

There are other big fish circling. Given how cheap debt is , there are enough and more funds of various stripes, including probably the notorious 3G Capital and their close friend Warren Buffet, who are getting all excited. Also interested would be two giants in the cosmetics field - Unilever and Procter & Gamble, who have long eyed Nestle's stake with envy and made noises about what a Foods company is doing with a stake in a Cosmetics company.

Complicating this will be nationalism, for after all L'Oréal is (very) French. Would Macron be willing to let a French institution fall into the hands of the ugly Americans ? If he interfered, the tweeter in chief would surely have something to say !!

And what will Françoise Bettencourt Meyers, Liliane's daughter and the two grandchildren to whom the 30% stake in L'Oréal passes, do ?  Would they act in concert. Or would they go their own ways ? Would they buy ? Or sell ?

Every investment banker is drooling and shivering with anticipation. It is fair to assume that no first class seats are available on all flights to and from Paris, London, New York and Lausanne !

Watch this space. The knives will be out on 18th March when the six months period after Bettencourt's death ends and  all agreements expire.    Bettencourt's life was colourful to say the least - marrying a Nazi sympathiser, losing money with Bernie Madoff,  a strange affair with her photographer, being declared mentally incompetent, accused of giving cash stuffed envelopes to Nicolas Sarkozy,  having numerous Swiss bank accounts ...... But even by those standards, what will follow in the fight for L'Oréal will be, to put it mildly, interesting.

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Turn the world vegetarian

Humans love eating meat. Vegetarians and vegans (this blogger is a vegetarian) don't stand a chance. In quite a few countries in the world, you simply have to starve if you are a vegetarian.  In many others, your only ordering choice in a restaurant is likely to be an apology of a salad, that could more appropriately be fed to a cow !

Any chance that you can turn the human race into vegetarians ? Well, at least one company thinks so. The aptly named Impossible Foods based in California (where else)  would like to try. An interesting Q&A with the founder that I read in the Guardian, prompted this post.

The logic for turning the human race vegan is impeccable. The largest environmental impact that humans have created is from rearing animals for food - cows being the primary culprit. The resources utilised - water, land, etc - per pound of meat is also the largest. The absolutely atrocious conditions in which we rear and kill farm animals has to be a permanent blot on the human species (pig farmers in Iowa - are you listening ?) And if the population of farm animals decreases, there is a better chance of wildlife prospering,  as one of the chief causes of habitat loss is grazing. 

Of course, this is not going to happen. Go back to the first sentence of this post. 

I however have this feeling, totally unsubstantiated by data, that this might be a long term trend. Technology in food production is on the cusp of a revolution. After all humans don't eat meat because they like to kill animals. They eat it because they love the taste. If, and when, plant based foods are engineered to taste like meat, there is every chance that people will start to switch. Especially if it is cheaper.  And then, slowly, the ethical side of it will start to play a part. If you can satisfy your nutrition and the craving for taste without killing, why wouldn't you do it. After all, if many of the meat eaters actually saw how their meat was being produced, a good proportion will turn vegetarians immediately !

But this is not going to happen in a hurry. Impossible Foods is just a fad and, this being California, fads are always welcome. But good luck to them. I might even come out of retirement and open the India branch - at least it will get me into the good books of the awful gau rakshaks !

But one day, in the distant future, maybe 100 generations later, our descendants will look upon with horror at "prehistoric man" for killing and eating animals. And maybe somebody will read my post from the archeological archives and pronounce me as a prescient wise man !

By the way, the photo is that of a veggie burger .

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Screw around with Kraft

What do you call something who is passed from hand to hand ? Used goods ? Probably something worse ? Well, that is what we have to call Kraft these days.

With a touch of slight (?) exaggeration, you could say that the land of mom and apple pie, could be stretched to include Kraft too ! Read on to see the list of brands this company owned at one time or the other, and even the Professor - he of the class war against processed foods - would have had one of those some time or the other. Its a quintessentially American company. And yet the way it has been sold and bought and sold and bought again makes somewhat depressing reading.

As is usual with many of the well known companies, there is always a visionary entrepreneur in the beginning. There was a James L Kraft. He was born in Canada, but emigrated to the Chicago in 1903 and started selling cheese from a horse drawn cart. In 1916 they developed a new process for pasteurising cheese, enabling it to be shipped long distances and patented it. Then came World War I, the need to provision the army and Kraft took off. In 1928 came Philadelphia cheese. In 1930 it merged with National Dairy, then the leading ice cream company in the US and became a full fledged Dairy Products company. 1926 saw Breyers, a famous ice cream brand;  1935, Sealtest, another iconic ice cream brand.  It grew and grew and became a globally recognised company and one of the giants of the food industry.

Then came 1980 and the barbarians. Wall Street types seem to have a peculiar fascination for Kraft and it become the favourite darling of deals. In 1980 a merger was engineered with Duracell and Tupperware. Immediately thereafter it sold all the non food businesses including Tupperware, but retained Duracell. In 1988 it sold Duracell to private equity firm KKR. In that mad winter of 1988, when dizzying deals were done, Kraft itself was acquired by Philip Morris (the largest tobacco company in the world) . Philip Morris merged Kraft with its General Foods business (of Maxwell House, Jell O, Kool Aid and Tang fame ) and created Kraft General Foods.  In 1990 they bought Jacob Suchard a big European coffee company and also the owner of Toblerone. In 1993 came Shredded Wheat. In 2000, Philip Morris acquired Nabisco and merged it with Kraft. Into the fold came Oreo, Chips Ahoy, Ritz, etc. In 2001 Philip Morris IPOed Kraft and it became an independent company again. In 2009, Kraft acquired Cadbury. In 2011 it split itself into two companies - the North American Kraft and the global Mondelez. And then last week, Warren Buffett and 3G bought out Kraft and will now run it together with Heinz which they already own.

Whew. That is a dizzying pace of changing of hands. How can a business survive this level of buying, adding, stripping and selling all the time. I wonder what the suppliers, consumers and employees make of all this. Businesses need some stability. Wall Street types doing financial engineering, don't do much for the long term health of the business.

There is one saving grace. Warren Buffett is not a wheeler dealer. He holds for the long term. Maybe Kraft will get some stability now.

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Oink Oink; I am taking over the world

What do you think the purpose of agriculture is ? To feed people, right ? Wrong ! The purpose of agriculture is to feed pigs. Very shortly more than half the crops grown in the world will be used to feed pigs. This was the astounding revelation I read in The Economist here.

The problem is  China.  The staple diet of the Chinese is not rice or wheat – it is pork.  Pork is eaten in astounding quantities, every day, every meal.  In India, governments fall over the price of onions, in China they will fall over the price of pork. So much so that the Consumer Price Index is jokingly referred to as the Consumer Pork Index !

The Economist article throws out mind boggling implications of this Chinese fixation with eating a pig. The Amazon rainforest  is being cleared in Brazil to grow soya to feed Chinese pigs. The Chinese are buying up land all over Africa and Latin America, not to feed their people , but to feed their pigs. One of the biggest source of water and soil pollution in China is pig waste. One fifth of the emissions produced in the world is from livestock and the biggest contributors to this are American cows and Chinese pigs, through their flatulence of all things. Pig farming has become so intense in China that they are like factories – pigs are born and live all their life in metal pens, they never see sunlight, they are all artificially bred, they are given antibiotics with every feed , they are fattened beyond their natural size and they are killed as soon as they become big. Because of the routine dosing of antibiotics, they are also one of the sources for the emergence of antibiotic resistant bacteria.

The Chinese government is so obsessed with pork prices that it appears to be having a “pig bank” to stabilize pork prices. This comprises both of pork and live animals. Presumably the live  animals form the porcine wing  of the Communist Party.  They also have to subsidise pork production – by an astounding $22bn in 2012 , it appears.

There is little chance of turning the Chinese into vegetarians. They don’t even have a word for vegetarianism in Mandarin – this blogger knows to his cost !!  Their gobbling up of pigs is only bound to increase. Hollywood should forget about movies such as The Zombie Apocalypse. Instead, they should try The Porcine Apocalypse !!

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From Draught to Craft

This blogger is not a beer drinker.. He is therefore completely ignorant of the niceties of beer and therefore eminently qualified to comment on developments in the beer industry.

In many countries in the world, people, especially men, gulp down enormous quantities of beer. Most of it is mass produced by the beer giants of the world - Diageo, Anheuser Busch, SAB Miller, Heineken and the like, including our own home grown United Breweries. Bottled or canned beer is by far the largest selling channel for beer - the one that keeps afloat the likes of Diageo, et al. But nuanced beer drinkers consider this somewhat of a travesty in beer drinking - apparently they have no taste. Hence the onset of draught beer which is served out of cask or a keg. Go to a pub  and barmaid will pour out a pint of draught, topped with a nice head. This blogger has a partiality to buying rounds for whoever he is with - not to taste the subtleties of the draught but to ogle at the barmaid - who is invariably pretty and used to men ogling !!!

But apparently even draught is "rubbish" to a true connoisseur (can such a specimen exist ?) Enter craft beer., something this blogger had not heard of before and hence this post. Craft beer is apparently produced by microbreweries -  small independent breweries and supposedly offer great quality, taste and variety. They have to be small - no giant multinational can qualify to make and sell craft beer. Craft beers have evidently loyal clientele and apparently possess great virtues of taste and subtlety.

If this is so, then this blogger was surprised to read that Jim Koch , the owner of Boston Beer with the famous Sameul Admas brand has become a billionaire. Good to see an entrepreneur succeed and become a billionaire, but since when has a billion been "small".  Apparently craft beer has been taking the American beer market by storm. Considering that every individual who can, does drink beer by copious quantities in that country (remember six pack was originally a concept of a carton of beer, before abdominal muscles usurped the term), you would expect the market to be flat, if you will pardon the pun. The overall beer market indeed is, declining by some 2%. But craft beers are growing by 15%. Thank you very much.

Perhaps there is a growing consumer fatigue with mass produced, similarly bland tasting food that the large food and drinks behemoths make. For improving margins, they have continued to chip away at quality and ingredients. That food is cheap, but perhaps far too much liberties have been taken in terms of customisation and taste. In many segments, the small food maker has started to grow. Just goes to show that the food industry is one of the most difficult to standardise and globaliise, for we will always have different tastes and demands. Even Nestle, the world's largest food company has a market share of less than 5% of the overall food market.

So craft beer it is. If you are in the US, go for Sam Adams. If in the UK, try BrewDog's fancifully named Hello, My Name Is Beastie. There are a couple of beer connoisseurs amongst this blog's readership. Learned comments and sneers are welcomed. This blogger is happy to buy them a round, for he rather fancies the barmaid !

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Not so Yummy

Kentucky Fried Chicken is owned, by a company with a distinctively “uncorporate” name – Yum! Brands, complete with the exclamation mark.  This blogger is a vegetarian and therefore has not really sampled its wares. But I am reliably told that its fried chicken, is fairly delicious.  But these days, alas, KFC is not sounding very yummy.

The problem is in China. KFC is everywhere in China. I mean everywhere. Sometimes I wonder if the icon of Americanism in China is not McDonald’s or Coca Cola, but KFC. Every street corner seems to have one.  The Chinese were happily munching or chewing or licking, or whatever you do with fried chicken. All that changed in December of last year. CCTV, that great bastion of broadcasting  and China’s answer to Doordarshan,  aired a program that claimed that local suppliers to KFC had given its chicken excessive amounts of antibiotics.  CCTV is more renowned for informing the world that Xi Jinping had a good night’s sleep rather than do investigative reporting. But, expose, it did. I am not aware of the merits or the details of the case, but you can imagine what happened to the sales of KFC in China. It dropped by a vertiguous 41% in January.

Ouch. KFC has recovered from earlier unfavourable events – SARS and Bird flu, although it was responsible for neither. Apparently, the Chinese can’t be kept away from fried chicken for long. But will it recover from this latest blow ? The Chinese are fed up with food adulteration. Remember baby food adulterated with melamine some 3 years ago.

Yum! Brands , is of course, not just KFC. Its also Pizza Hut and Taco Bell. So the company will ride this crisis. But its exposure to China is massive.  Half its global sales of some $4 bn comes from China. And this is the dilemma of China. The opportunity is massive. But the risks are also high.

This incident also calls into question the issue of safety or desirability of processed foods. Popular perception is that all processed food is bad. Nothing could be farther from the truth. In fact the so called “fresh” product is often the most unsafe.  Just compare tap water with Bisleri. If you knew what the “fresh veggies” went through before they landed in your shop, you might be tempted to turn non vegetarian. If you bought that raw turmeric from the store – well, I will spare you the gory details of what that goes through. Will you buy milk from the milkman if he brought the cow to your doorstep ? The less said about hygiene in the neighbouring  Udipi, the better.

In general, responsible companies that process food take greater care; from the farm gate to the time it is processed. Like for like, processed food is actually safer than “fresh food” – unless you grew it yourself.  But as the KFC incident, or the horsemeat problem in Europe shows,  there can be disastrous lapses there too.  In the quest for profitability – individual or corporate, risks are taken with food; chiefly pesticides in crops and the cocktail of hormones and drugs with animals.

Any takers for retiring to the ancestral village (Sriram – the distance from Eugene to Pattamadai is rather long !) and growing your own stuff in the backyard ?

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Can the world still feed itself ?

When Peter Brabeck-Letmathe speaks, you listen. He is the highly respected Chairman of Nestle. In his weekend interview with The Wall Street Journal published here, he speaks of the increasing danger of food insecurity in the world.

Food prices shooting up, the world over, is a serious cause of concern. This blogger has moaned about it here , here and here . The traditional activist response is to bleat about the evils of globalisation. But here is a world leader giving a simple way forward for what should be done.

His prescription is three fold and simple

- Stop using land for growing corn for biofuel

- Do not maniacally oppose technology in food cultivation, especially genetically modified crops

- Let the market price water for industrial use

I had no idea that this year American farmers would harvest more corn for fuel rather than for feed. This is the outcome of a subsidy policy that has encouraged bio fuel use to get away from the human addiction to petroleum. But look at the consequence for food - a perfect example of how policy in one sector can have serious consequences in another. Single issue activists please note - policy making is complex and interwoven and you can often cause more harm than good by manic obsession with a single issue. If you balance food prices with reducing petroleum dependence, it is not an easy choice. But as Brabeck-Letmather says, we should consider using land only to grow food.

The almost religious opposition to genetically modified crops is , in my view, absurd. We have been genetically modifying crops for virtually of all of human existence. It is called plant breeding. Wheat, Rice, etc as we now it, are all genetically modified. It appears that it is OK to genetically modify slowly, but not OK to modify quickly. World over, there are already laws to look after food safety and there are laws for labelling food containing genetically modified cops. So if you oppose it, that is certainly your right and you are free not to consume it. But to insist that nobody else should do so is unacceptable in my view. Again there is a policy choice. Between letting food prices go so high that some people starve or suffer malnutrition and being scared about the gap between reasonable surety and absolute surety on the safety of such crops. That whole argument has been hijacked by ranting against multinationals, globalisation etc, which is another story and beyond the purview of this post.

The third remedy is interesting. Apparently only 1.5% of the world's fresh water consumption is for personal use - washing, bathing, etc, The rest is for agricultural use or industrial use. Brabeck-Letmathe's solution is stunningly simple. Keep water for personal use free. But let the market price water for industrial or agricultural use. That will ensure that water 9100 litres of water are not used to make 1 litre of bio diesel.

A superb interview which I would strongly recommend for anybody interested in food security for the world.

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Fair Price Shops. Fair to whom ?

On a walk the other day, I spied a shop that was a "fair price shop". There are many of them dotted around cities and towns in India. They are usually shut with a "No stock" board hanging in front. They are part of government initiatives to sell foodgrains and vegetables at "fair prices". They are not ration shops, mind you, which are designed to sell subsidised grains to the poor. These are shops where you and I can buy as well. At "fair prices".

Begs the question, fair to whom ?

Here's Economics 101 for the economically challenged. Prices are fixed by supply and demand. A willing seller and a willing buyer together fix the price. As long as there are many sellers and buyers and as long as there is information on what everybody is buying and selling at, the price that is so determined freely is what is a "fair" price.

But to Rajalakshmi, a fair price is a low price. Nothing wrong with buyers wanting the lowest possible price, but that can't be necessarily termed as fair. According to her, the "poor" farmer is being cheated by nefarious middlemen who is then overcharging her and making obscene profits. It is still fashionable in India to rail against all middlemen and term them as hoarders, blackmarketeers, racketeers, and such other colourful terms.

This is complete bunkum. The one market in India that is reasonably close to a perfect market is the one for foodgrains and vegetables. The more perishable the commodity, the more perfect the market. With the advent of mobile phones, farmers now have ready information of wholesale market prices. They usually shop around for the best prices they can get - gone are the days where the villainous middleman could pay the farmer a pittance and sell at the market a kilometer away at a fortune. The middleman has little elbow room to make huge profits. Prices are now very transparent in wholesale markets and price fixation is virtually impossible - the next market is only some 50 kms away and the mobile phone instantly relays prices there.

Speculating is real tough. Commodity and futures markets are in infancy and not a factor. Hoarding in the anticipation of better prices is equally challenging. Firstly storage space is non existent or extremely expensive (India is a country of third world prices in everything except land and property which are above first world prices). The economics simply does not work out. Secondly investment in storage, especially cold storage is wildly expensive. Pest infestation is rampant. That's why some 20-30% of food production in India goes waste. It simply doesn't make economic sense to hoard. And finally Rajalakshmi is the most astute of buyers. She may be intellectually challenged in other fields, but in buying food, she is the queen. If a shop sells something at 0.5% cheaper, she is sure to find out. All the ingredients of a perfect market are there.

That's why food prices fluctuate daily. And often wildly as they move in tandem with supply and demand. When prices shoot up, its not that somebody is making a huge profit. Usually supply is low because of a natural calamity or a crop failure. In that case the high price is a fair price to the producer. Consumers have the choice of switching to something else. The price is also fair to the consumer who buys at the high price because she is choosing to do so, valuing her taste for that particular item. What Rajalakshmi wants is a low price, no matter what, with "somebody" subsidising her. Well , who is that somebody ?I can argue the case for the poor being subsidised and cushioned against high prices of food. But Rajalakshmi ?  She, who is going for a pedicure ? No way.

That's why "fair price" shops remain mostly shut with the no stock sign. They are fair to nobody and are a prehistoric relic of India's dalliance with an outmoded socialist philosophy.

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Please Sir, I want some more

Onions in India. Cabbage & pork in South Korea. Chilli Peppers in Indonesia. Frighteningly, wheat globally. Riots have already started in Algeria , and is sure to spread. Food price inflation is hitting the world again. Millions of children will echo Oliver Twist's begging in those immortal words which are the title of this post. Are we going to see a repeat of 2008 ?

This blogger is no expert on food economics. But the issue of food prices is close to his heart and he has posted on the awfulness of food price inflation here before. All inflation is bad, but food price inflation is especially awful. For it ceases to be an economic problem of supply and demand and becomes an issue of survival for half the world's population. It sparks a humanitarian crisis. And it will inevitably lead to unrest and riots. The world cannot afford inflation in the price of food. Certainly not the high double digit inflation that it is seeing.

The issue is a complex one. World food supply and demand is in a precarious balance. In the short run, any disruptions in supply, usually due to natural calamities leads, to a massive spike in prices. This year the wheat crop has failed in Russia and Australia. But the issue of enhancing supply is a longer term one. The gains due to scientific revolutions in crop breeding, use of fertilisers, and the like has started to taper off. No new breakthrough is coming.

The use of large cultivable land to grow bio fuels, especially in the United States is another contributor to pressures in supply. Cultivable land is finite. Any use for other than food growing, will result in lower food supplies.

On the demand side, there has been an inexorable rise, which is actually a good thing. A chief cause has been the economic development of China and India. Higher levels of nutritional requirements are a happy result of economic development and has led to continuous increase in demand. The same will happen in Sub Saharan Africa.

A third cause for inflation is the price of oil. Oil prices affect not only in food transportation, but also in price of fertilisers. Oil is a key input cost in the growing of food. And we know where oil price is - last at $93 a barrel.

A fourth cause is awful government policies. Because agriculture is an emotive subject, every government under the sun has an unbelievable maze of subsidies, freebies, giveaways that completely distort the economics of food production and consumption. And the immediate reaction to even a perceived shortage is a banning of exports - Russian ban on wheat exports are a direct cause of the rise in wheat prices. India and Pakistan are playing silly games with banning onion exports.

I am afraid food prices are going to be high for the foreseeable future. This is an inevitable equilibrium point, I believe. With high prices, will hopefully come more investment, more capacity creation, technological breakthroughs, etc etc . In other products this will happen quicker. Agriculture, because it is heavily distorted by government action, will see this much much slower. But even after this, the price levels will remain higher. This has profound implications for the world's poor - even today, hunger is not because of lack of food. Its because of lack of affordability.

Like every opinionated commentator, this blogger has his points of view on what ought to be done. It is the intention that this subject will feature repeatedly over the coming weeks. Meanwhile I invite you to ponder over the problem and share your ideas. I believe this is one of the most pressing problem facing the world today.

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