Saturday, June 25, 2011

A Case Study

Could it be that competing in the global market place has gotten a lot harder since the 70's, so chief executives who have to deal with that are getting paid more?

At the same time it's gotten easier to pump milk so the wage for that has decreased.
Edwin Drood
Of the multitude of things I know absolutely nothing about, the dairy wholesaler's market is one I really haven't thought anything about. An article this past weekend in The Washington Post on the growth in executive compensation at Dean Foods, comparing it to the stagnant wages of workers at the same company, prompted the above reply. I thought rather than dismiss out of hand the contention that the differences in the trajectory of pay between the CEO and workers were understandable and morally and socially acceptable, I would investigate the case in particular to see if it were, in fact, true. Edwin offered a falsifiable set of conditions by which understanding the question is possible. I thought, why not use those as a way of seeing if he was right or wrong.

The initial source is the Post piece itself. It begins by outlining the compensation for the chief executive at a precursor of Dean Foods.
It was the 1970s, and the chief executive of a leading U.S. dairy company, Kenneth J. Douglas, lived the good life. He earned the equivalent of about $1 million today. He and his family moved from a three-bedroom home to a four-bedroom home, about a half-mile away, in River Forest, Ill., an upscale Chicago suburb. He joined a country club. The company gave him a Cadillac. The money was good enough, in fact, that he sometimes turned down raises.
So, this is the set of initial conditions posited - the wholesaler in question was the nation's largest; the executive in question lived a more-than-modest life of the upper-middle-class rather than the truly wealthy. This description is contrasted as follows:
Forty years later, the trappings at the top of Dean Foods, as at most U.S. big companies, are more lavish. The current chief executive, Gregg L. Engles, averages 10 times as much in compensation as Douglas did, or about $10 million in a typical year. He owns a $6 million home in an elite suburb of Dallas and 64 acres near Vail, Colo., an area he frequently visits. He belongs to as many as four golf clubs at a time — two in Texas and two in Colorado. While Douglas’s office sat on the second floor of a milk distribution center, Engles’s stylish new headquarters occupies the top nine floors of a 41-story Dallas office tower. When Engles leaves town, he takes the company’s $10 million Challenger 604 jet, which is largely dedicated to his needs, both business and personal.
This is the set of current conditions. Getting from then to now is the matter at hand.

The article posits another set of conditions that is part of the story:
Over the period from the ’70s until today, while pay for Dean Foods chief executives was rising 10 times over, wages for the unionized workers actually declined slightly. The hourly wage rate for the people who process, pasteurize and package the milk at the company’s dairies declined by 9 percent in real terms, according to union contract records. It is now about $23 an hour.

The Dean Foods website, linked above, does not include a history of the company. While not necessarily reliable, Wikipedia does have the advantage of footnotes with links in order to check the information presented. Dean Foods has a Wiki page, that skips over the beginnings of Deans in my neck of the woods as a small dairy distribution company to 2001 when Suiza Foods, a Dallas-based conglomerate, purchased it and changed the name from Suiza to Deans. The list of product names it either names or licenses is long:
Dean Foods produces soy milk in the United States under the name Dean Foods and (Sun Soy). organic milk is marketed under the brand Horizon Organic.

White Wave Foods is the distributor for Silk soy milk, Horizon Organic dairy products, International Delight creamer, some Land O'Lakes dairy products, Hershey's milk products,[citation needed] and Stōk espresso shots.

The company's TofuTown brand and its various tofu products were acquired by the Hain Celestial Group in June 2007.

Dean Foods owns many other brand names, such as Alta Dena, Barbe's, Barber's, Berkeley Farms, Borden, Broughton Foods Company, Brown's Dairy, Country Fresh, Creamland, Dairy Ease, Gandy's, Garelick Farms, Jilbert's Dairy, Lehigh Valley Dairy Farms, Liberty Dairy, Louis Trauth, Mayfield Dairy, McArthur Dairy, Meadow Brook, Meadow Gold, Model Dairy, Oak Farms, PET Dairy, Price's, Purity, Reiter, Robinson Dairy, Schenkel's, Schepps, Swiss Farms (formerly Wengert's Dairy of Lebanon, Pennsylvania), T.G. Lee, and Tuscan Dairy Farms.[citation needed]

Dean Foods licenses the Land O'Lakes brand, which markets creamers and fluid dairy products.[12]
Not included in this list is the Wal-Mart name-brand, Great Value milk. As someone who unloads pallets of GV milk off a Deans delivery truck, take my word for it - even if they don't own the license for the name, they distribute it, probably from plants in which different labels are slapped on different milk jugs.

According to Wikinvest, Deans Foods "is the largest processor and distributor of milk and other dairy products in the U.S., with products sold under more than 50 familiar local and regional brands and a wide array of private labels.[1]" They were so described in the late 1970's, so the question still remains - is "competition in our contemporary market" more difficult? Even when Deans was a regional operation, it was the largest dairy wholesaler in the country. Now that it is an international conglomerate with plants and distribution networks in both the United States and the United Kingdom, not only distributing dairy products but selling in-house and licensed brands of dairy and associated products, has its market share been the result of executive business sense or the purchase of a variety of brands?

If you click on the "BRANDS" at the top of the Deans Foods homepage, you will find a list of national brands it owns or licenses - from Horizon and Silk and International Delight and Land-o'-Lakes - to the regional brands it either distributes or owns. The only regions of the country it doesn't seem to have control of regional brands is the lower Midwest (Missouri, Arkansas) and the Pacific Northwest. With control over leading national brands (we love Land-o'-Lakes salted creamery butter in our house), however, this lack of local and regional control is not as big an issue as it might otherwise be.

According to Wikinvest, Deans "is the largest processor and distributor of milk and other dairy products in the U.S., with products sold under more than 50 familiar local and regional brands and a wide array of private labels.[1]"
Dean Foods manufactures and distributes dairy food products to retailers, distributors, foodservice outlets, schools and governmental entities across the United States. Both the Dairy Group and WhiteWave Foods are heavily dependent on its main customer, Wal-Mart Stores (WMT), which accounted for 21% of the Dairy Group’s 2009 net sales.[2]

Both the Dairy Group and WhiteWave Foods use Dean’s extensive direct store delivery system, or DSD, which transports products from processing facility to customers’ stores via refrigerated trucks. Dean’s ownership of such an expansive DSD system has made it the only national dairy beverage company in the U.S.
If they are "the only national dairy beverage company in the U.S.", where is the competition?

In March of this year, Deans Foods and Justice Department reached a settlement in an anti-trust action brought when Deans planned to purchase a Wisconsin dairy. According to The Wall Street Journal:
The Dean Foods case was part of the effort by the Justice Department, under the Obama administration, to step-up antitrust enforcements in the agriculture sector, which has undergone rapid consolidation in recent years.

The deal was too small to be reportable to the government. However, the Justice Department moved to block it anyway after deciding it would eliminate competition between the two companies in the sale of milk to schools and stores in Illinois, Michigan and Wisconsin.

"The proposed settlements restore competition so that school children and consumers in Illinois, Wisconsin and Michigan, will pay lower prices for their milk," said Christine Varney, the head of the Justice Department's antitrust division.

Dallas-based Dean Foods said it agreed to settle the cases— which were also brought by the attorneys general of Wisconsin, Illinois and Michigan— to avoid the time and expense of fighting them.

"We continue to believe that our acquisition of the Foremost Farms assets in Wisconsin supported competition and benefitted consumers," the company said. "However, because ongoing litigation is expensive, distracting and brings uncertainty to our business, we believe that this resolution is in the best interest" of employees, shareholders and consumers.

Dean Foods bought the Foremost unit in April 2009, including its dairy processing plants in Waukesha and De Pere, Wis. The company said the proposed settlement, which must still be approved by a judge, allowed it to keep the De Pere plant.
Rather than concentrate on product improvement, Deans Foods has dealt with competition in the time-honored fashion of high- and late capitalism: eliminate it by buying it. From the days of Rockefeller buying out other oil refineries in the Cleavland, OH, area, then buying controlling interests in various railroads in order to control the shipping prices for distributing its products, the best way to ensure continued high market share has not been competition, as the theory of capitalism claims, but to get rid of competition as inefficient, reducing not only marketing and R&D costs, but creating broader efficiencies in what was once known as vertical market control (like Deans fleet of trucks or Standard Oil's fleet of railroads from the Lehigh Valley RR, for which my grandfather worked his entire adult life to the Pennsylvania, B&O, and other larger national rail lines).

So, does the current CEO of Deans Foods "deserve" a salary and benefits that dwarf his predecessor from a generation ago? In the first place, the name "Deans Foods" and its regional visibility in the Upper Midwest is all that remains of the former regional, but still largest in the nation, wholesaler of dairy and related products. Having been purchased by another company, who changed their name for reasons of market recognition, Deans Foods no longer exists in the same way it did in 1979. As CEO of a multi-national with huge market share through purchase and license of a variety of products and the largest DSD network of any wholesaler, one could argue that a larger compensation package is called for.

What about those stagnant wages for workers? In the first instance, these aren't dairy farmers, now a pretty high-tech industry, although also still labor intensive. Rather, the workers in question are the folks who work in Deans plants (including one just up the road in Harvard, IL) who have not seen a concomitant rise in pay with the rise in market penetration by Dean Foods.

Why is that?

According to this USAToday story from April - one of many I could cite:
At a time most employees can barely remember their last substantial raise, median CEO pay jumped 27% in 2010 as the executives’ compensation started working its way back to prerecession levels, a USA TODAY analysis of data from GovernanceMetrics International found. Workers in private industry, meanwhile, saw their compensation grow just 2.1% in the 12 months ended December 2010, says the Bureau of Labor Statistics.
So, it isn't just Deans Foods. Trends across business show modest (at best) increases in worker pay even as executive pay rises rapidly.

The reasons for this disparity seem to escape analysis. The trend crosses industry barriers, matters of competitiveness, and even shareholder return. Considering the bonuses and salaries awarded to the large banks that brought the entire world economy teetering on the edge of collapse, there is no link between performance and compensation. High rates of pay for executives and senior management have entered the realm of entitlement, rather than linked to any measurable results.

This glance - and it has only been a glance, blogs being the medium they are - at Deans Foods as a way of asking whether or not higher compensation has yielded, in this case, at least a couple tentative answers. First, it is not a matter of the CEO "working harder", nor of the demands of competition. Considering the CEO's sole desire seems to be purchasing rival dairies, including regional dairies and distributors, while both successful and a commonplace in business, it is hardly akin to any theory of capitalism with which I am familiar (monopoly does have its advantages, but folks usually support competition rather than its elimination when touting the virtues of the market). Furthermore, since the case of Dean's reflect national trends in the differences between executive pay and worker pay, one cannot set it to the specifics of Deans Foods, the market in dairy production and distribution, or the vagaries of milk production. The question, still unanswered, is the source of the disparity, and whether or not it creates sustainable socio-economic conditions.

According the the CIA's Gini Index in its World Factbook, the United States income distribution levels are slightly better than those of Jamaica, Uganda, and The Philippines, and slightly worse than Cameroon, Cote D'Ivoire, and Iran. We are thirty-ninth overall, with number one, Namibia, being the country with the greatest disparity in wealth. Considering Cote D'Ivoire is undergoing a civil war, this isn't exactly a good sign; considering our levels of maldistribution of wealth rival most of the developing world, that poses a challenge to any who defend the continued efficacy of untrammeled capitalism and a free political system.

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