Thursday, October 15, 2020

"Extinction & Survival" (and how Anheuser-Busch survived prohibition)

From Woodlock House Family Capital, August 14:

“Extinction is the rule. Survival is the exception.”
- Carl Sagan

There’s been a lot of talk about how the pandemic has accelerated many trends already in place. The move to digital commerce, for example, at the expense of physical retail. Or the trend toward more people working at home instead of an office.

But the pandemic also creates a totally new environment for many businesses, such as restaurants. Old economic models may not be able to survive the adjustment. For example, those models that depend on diners being packed in at the restaurant, as opposed to those that can adapt to delivery or carryout.

I’ve been thinking about how the sudden shift in the business environment is, in some ways, akin to extinction events in biology.

Economies also suffer major extinction events. If you were invested in a public company listed in China’s stock market in 1949, you got wiped out when the communists took over. Ditto Russia in 1917. There have been other markets that have gone to zero, or near zero, due to some major economic or political quake. Lots of businesses die all at once (or over a short period of time), just as in a biological extinction event.

Of course, there are minor extinction events, too. Bubbles that pop and leave a trail of bankruptcies. Or when governments change the rules of the game in a severe and sudden way so that companies have to scramble to adjust or just go out of business.

One of my favorite stories along these lines is how Anheuser-Busch survived prohibition. Murray Stahl tells the story in his book How They Did It: Exceptional Stories of Great Investors. Ever wonder how Anheuser-Busch survived prohibition? The government made it illegal to sell beer. That would seem to be a big problem for a brewer.

But they did survive. First, they tried to make different products. Ice cream, for example. And non-alcoholic beer. On the latter effort, the company offered a refund if you could taste the difference. Most people couldn’t. But they still didn’t buy the beer. Which tells you something.

Anyway, none of these worked. But management did eventually figure out a response that saved the company. They saw a loophole in the law. You couldn’t make, sell or transport alcoholic beverages. Okay. But it didn’t outlaw making, selling and transporting unfermented malt extract… which customers could then take home and use to make their own beer by adding water and allowing it to ferment. This is what Anheuser-Busch did; they began selling malt extract.

Soon they were selling 6 million pounds annually, which can make an enormous amount of beer. August Busch said, “We ended up being the biggest bootlegging supply house in the United States.”

Murray Stahl, reflecting on this bit of history, wrote how it humbles the short seller, because it shows how “companies, if they are well capitalized, can be very resilient.”...