BRB Bottomline: Did you know that Noah’s Bagels is owned by the same company that pours your Peet’s Coffee? The same company sells those Krispy Kremes you see students munching on along Sproul. Has Berkeley sold out to capitalism, and does capitalism control our lives?
Ever heard of Reckitt Benckiser? They make the Air Wicks that you plug into the bathroom socket; the Lysol wipes that Mom brings up every time she visits; every Dr. Scholl’s foot insole upon which the fine men and women of Croads and Cafe 3 serve you chicken pot pie; and Durex.
For every dollar you spend on Reckitt Benckiser products, ten-percent of the profits go to the Reiman family, a set of well-endowed heirs that also just sold you your Peet’s coffee, Noah’s bagels, Krispy Kreme donuts, and Clamato tomato-clam juice.
The Secret to JAB Holdings’ Success
The Luxembourg-based private investment fund is called JAB Holdings. Since 2012 to 2018, the company has grown the value of its investments from €10 billion to €25 billion ($30 billion), which represents a 15% compounded annual growth rate (CAGR) over the past six years. How does the company do it?
Without discounting the incredible ability that JAB and the Reiman family have exhibited in identifying viable food and beverage acquisitions, the company has been able to generate incredible returns over the cost of capital because the world is awash in capital. With the Federal Reserve’s scheme to pump $4 trillion dollars of capital into the U.S. financial system, called Quantitative Easing (QE), alongside zero-interest rate policies (ZIRPs) around the world, companies have been able to borrow money as cheap as they’ve ever been in corporate history. Some cheaper than governments.
JAB Holdings has benefited enormously from the ability to raise cash by issuing debt at low interest rates. In 2018, the company was able to raise €1.5 billion ($1.75 billion) at an average weighted interest rate of 2.125% a year for the next decade. For reference, the U.S. government paid investors 2.91% in June for the same privilege to borrow money for 10 years. Investors think JAB Holdings has a lower default risk than the U.S. Government!
Over just the past four years, JAB Holdings has been able to raise €6 billion ($7 billion) at an average interest rate of 1.82%, which is more than 100 basis points cheaper than the U.S. Government and 500 basis points cheaper than what investors charged the Argentinian Government.
The (Right) Things to Be Worried About
Corporate profits in the U.S. have been relatively stagnant around $2 trillion a quarter since 2010. If corporate profits haven’t been increasing and stock prices have risen to all-time highs, what does that mean for the future of financial assets and the stock market? Are we in a bubble? Three things:
The concentration of capital from QE and ZIRP into financial assets, which has expanded multiples.
Cheap debt going into stock repurchases instead of investment in R&D and capital expenditures.
Companies pursuing growth through acquisitions because the cost of capital is so low.
The first two points are topics for different articles, but the third topic is immediately relevant to why your asiago bagel and chai latte are made by the same company.
Since we know corporate profits have stayed stagnant but company valuations have increased, it must mean that profits have merely shifted towards the companies that have been able to take market share from their competitors. That, or they’ve acquired their competitors. This is what JAB Holdings and other food and beverage brands have done. Because these very large companies have access to cheap capital, they’ve been able to acquire competitors at relatively-expensive prices without those financial transactions not making financial sense.
If you’re able to borrow €6 billion at a cheaper rate than the U.S. Government, you can use that money to buy a lot of other things that will make more than what many investors consider a risk-less asset. This is arbitrage, and it has worked brilliantly for those companies with the connections, like JAB Holdings, that can call up any big bank to borrow big sums.
Has Berkeley Sold Out
Walk along historic Telegraph Ave., where the gamut of political activism, free speech, and human rights has been fought for and contested, and you begin to wonder whether these multinational corporations and the illusion of diversity they create is hypocritical. Does the illusion of choice consolidate important conversations about culture and diversity within the hands of a select group of people at the heads of these corporations?
This article is not the place to debate whether corporate consolidation has come at the exclusion of diverse cultures, but, at least from the perspective of a Berkeley student, I still see Berkeley and the Bay Area as the stomping grounds for immigrants around the world to be valued for the skills and talent they have without being prejudiced against for their race, gender, or class.
Rather, the most important thing as informed consumers is that we know who is making the things we consume and, when problems arise, who to hold accountable.
Take Home Points
Because the cost of capital has fallen over time due to accommodative monetary and fiscal policies, QE, ZIRP, tax cuts, etc., companies, especially those in the food space, have found opportunities for growth by paying up for acquisitions. Corporate consolidation has and is happening at rate that many consumers aren’t aware of. Part of being an informed consumer is knowing who makes the products you consume. And, as UC Berkeley students and Berkeley residents, we have the right and responsibility to maintain the diversity of thought and social awareness that keeps Cal the innovative thought engine it is.