All of us are aware of the famous American Express episode with Warren Buffet. To recount in brief, a company called Allied Crude Vegetable Oil, had a great idea. Buy up the entire soybean oil surplus, which was used to make everything from salad dressing to paint, and ship the oil abroad using government aid programs. To corner the market, Allied needed lots of capital to purchase modern equipment, pay high wages and lease over 100 giant oil tankers. There was just one problem, Allied never bought any oil. The company duped investors by filling its tankers with water and a few feet of oil. Since oil floats above water, it appeared to port inspectors that the ships were loaded with oil.
In 1963 it all came crashing down and lenders to Allied lost $150 million dollars (over $1 billion in today’s dollars). American Express had a warehousing division that stored Allied’s barrels containing “salad oil”. American Express took one of the worst hits in the scandal as its subsidiary, stored, inspected and vouched for the oil that was used as collateral for bank loans.
As a result of the losses American Express suffered from funding Allied, American Express stock, fell in price from 65 in October 1963 to 37 in January 1964. As legend goes, a young Warren Buffett, decided to make a huge investment in American Express, after having lunch in a restaurant and seeing people all around him continue to use their American Express credit cards. Although the company did a poor job of due diligence it survived and thrived because its main product, credit cards would always be needed. It also decided to compensate the lenders for the $ 32 million that they lost with American Express. Believing that the crisis was temporary and American Express was demonstrating the right values by footing the losses, Warren Buffett began buying shares and established a 5% stake in American Express for $20 million. American Express made a ten-fold move between 1964 and 1973. American Express was one of the first of the many successful investments Warren Buffett made.
The objective of recounting this tale is to underscore both Buffett’s genius as well as the ability of American Express to emerge unscathed from a life threatening episode. As all of us know, the brand American Express continues to sustain after over five decades.
Tough Times Don’t Last, Tough Companies Do…
There are enough parallels about tough companies in the Indian market as well that we can all draw a heart from.
In 1969, Karsanbhai Patel, a chemist in Gujarat manufactured phosphate free Synthetic Detergent Powder, and started selling it locally. The new yellow powder named Nirma was priced at Rs. 3.50 per kg, at a time when HUL’s Surf was priced at Rs 15. Soon, there was a huge demand for Nirma and by 1985, Nirma washing powder had become one of the most popular, household detergents in many parts of the country. One of the core segments of HUL, Detergents, was under a severe threat.
HUL decided to fight back by going against its traditional mode of doing business and go for the bottom of the pyramid that was not hitherto its customer base. HUL decentralized the production, marketing, and distribution of the product to tap the labor pool in rural India, quickly creating sales channels through the thousands of small outlets where people at the bottom of the pyramid shop. HUL also changed the cost structure of its detergent business so it could introduce Wheel at a low price point. This low priced offering was launched nationwide in 1988 and quickly gained acceptance, providing a strong competition to Nirma and regaining trust of HUL’s customers. HUL went on to gain double digit growth in its market cap over the next few years.
In recent years we are all too familiar with the Nestle and Maggi controversy where Nestle’s share price dropped from a high of 7300 in January 2015 to a low of Rs 5000 in February 2016, a 32% drop in market cap.
Indian regulators banned Maggi noodles in April 2015 after its tests found excess lead in noodle samples. The company had to remove Maggi packs, all 35,000 tons of the product, from store shelves. A court ruling overturned the ban in August, but Maggi’s reputation was severely damaged and regaining sales was difficult. From a high point of a 78 per cent market share in the Rs 38 billion branded noodles market, the Maggi crisis left the market open to competitors like ITC’s Yippee and Nissin’s Top Ramen and allowed aggressive players like Patanjali to enter the space with cheaper products in late 2015. The Maggi crisis had reduced the number of retail outlets selling Nestle products to 3.2 million at its peak, from 5 million.
The company responded by bringing in a new CEO, aggressively fighting the legal cases, proactively engaging with the customers and the media, and launching a spate of new products to fill the void left by declining sales of Maggi. Today the company has regained bulk of its lost market share in noodles and re-established Maggi’s credibility with customers. Result- its share price has more than doubled from its low of Rs 5000 in Feb 2016 to about Rs 11300 today.
Companies like Tata Motors (Nano debacle), Tata Steel (Corus acquisition) or Infosys (multiple changes at top level management) too have been braving crises and getting on with it. Of course there have been companies that have caved under and not emerged after a crisis hit it. What differentiates the two sets of companies is their DNA- a strong company’s DNA has been built to take shocks in its stride, come up with a new genetic code, mutate to a changed DNA in the changed environment and come out even stronger.
DNA of a company represents its culture, values and strategic thinking. All of these are different strands that go on to form the double helix that is its backbone as well as life sustaining phenomena. This may be formed in the initial stages of formation of the company, led by its founder or may be inculcated by a series of strong leaders who instil the right values and culture among the people. Such a nurturing remains so strong that its keeps on sustaining long after its original proponents and followers have left the organization. DNA also includes norms (what people think is the right way to behave), commitments (the promises people feel motivated to keep) mind-sets (deeply held attitudes and beliefs), and networks (connections among employees outside the formal structure). They add up to influence the ways corporate people think, feel, communicate, and behave.
As you read a company’s internal and external communication over a long period of time (preferably decades), you get a sense of its DNA. Often a company’s DNA gets established in its nascent stage and you get a sense of it, if there is baptism by fire. But the moot point is if a company has a strong DNA with right set of culture, value systems and strategic thinking process built in, it will be able to drive people leading the company at that point in time and help them guide the organization to safety and future growth.
So when you see a company in crisis, look at its DNA- its value system, its track record of strategic thinking, its response to a crisis in the past, or what is the reputation of its management. This will give pointers to the investors when deciding if the crisis is indeed life threatening or merely a hiccup in its growth story. And when you find a company deep in crisis but with its DNA intact, strong, and responsive, go ahead and invest. The company will soon bounce back as the seemingly life threatening crisis passes over.
Tough Times Don’t Last, Tough Companies Do…