A Trust-Busting Crusade and a Marketing Masterstroke
On this day in economic and business history...
The fifth month of 1911 is often remembered for the landmark dissolution of the legendary Standard Oil Trust, a judgment which put forth a standard of "reasonableness" in assessing the size and competitive efforts of massive companies. What's often forgotten is that Standard Oil was not the only trust in the government's crosshairs during the 1911 session. On May 29, 1911 -- just before its annual recess -- the Supreme Court dissolved the American Tobacco Trust, using the same standard of reasonableness it had set weeks earlier against Standard Oil.
American Tobacco was founded in 1890 by James B. Duke, who pioneered the use of mechanical cigarette-rollers and thus gained a level of control over his industry similar to that of oil-industry counterpart John D. Rockefeller. Duke already controlled roughly 40% of the cigarette industry by the time he founded American Tobacco, and his control only grew as the trust absorbed hundreds of smaller competing firms. This made it a logical choice to become one of the Dow Jones Industrial Average's 12 founding stocks, alongside several other notable trusts of the late 1890s. Despite the rapid growth of the tobacco industry following Duke's use of machine rollers, American Tobacco held onto its market lead right up to its dissolution: Two decades after its founding, the company still controlled between 75% and 80% of the tobacco industry, compared to Standard Oil's 65% share of the oil market on the eve of its breakup.
The dissolution presented similar problems to those of Standard Oil. Both companies controlled a wide range of vertically integrated operations owned by a large number of shareholders. However, where Standard Oil had geographical segments to consider, American Tobacco's breakup was more a question of branding and organizational separation, because much of the tobacco industry was (and continues to be) based in Virginia and nearby Southern states.
At the time of the breakup, the American Tobacco Trust controlled or held significant interests in 65 subsidiary companies in the United States, as well as two British companies. These interests were eventually separated into 14 different tobacco companies, of which four became an American tobacco oligopoly to replace the monopoly: R. J. Reynolds (now Reynolds American), Liggett and Myers (now Vector Group ), Lorillard , and a diminished American Tobacco.
Despite this setback, American Tobacco's market position and prestige were still meaningful enough to bring it back to the Dow in 1925. It remained on the index until 1985, when it was replaced by a fast-rising tobacco competitor that had always been just out of its grasp: Altria, then still known as Philip Morris. The remnants of American Tobacco's original business (after diversification and rebranding) were sold in 1994 to British American Tobacco, once American Tobacco's joint international partnership at the turn of the century.
The birth of a giant
The world's largest company (that you'll never be able to invest in) celebrates May 29, 1933 as its birthday, although the company itself was only formally created in 1988. How can this be? Perhaps it's best to let Saudi Aramco tell its own story:
[The] beginning, in Saudi Arabia, was in 1933. That's when the Saudi government signed a concession agreement with the Standard Oil Company of California, predecessor of today's Chevron , opening up a large part of the young desert country for hydrocarbon exploration. In March 1938, following three years of frustrating drilling, the first commercially viable oil field was discovered at Dhahran. The kingdom and the company never looked back, in time joining the ranks of the world's greatest producers and exporters of oil and natural gas liquids.
"Joining the ranks" seems like an understatement, as Saudi Arabia has for many years been the world's leading producer of oil, with consistent daily production of more than 9 million barrels nearly eight decades after that first successful oil strike. Key to this massive output is the Ghawar oilfield, the undisputed king of all oil fields. From its discovery in 1948 to the start of the 21st century, Ghawar supplied the world with an astounding 51 billion barrels of oil, and there are an estimated 71 billion barrels remaining. With reserves like these, it should be no surprise that the state-controlled Saudi Aramco is usually considered the most valuable company in the world.
Modern marketing's origin story
A simple, plain-text advertisement in the May 29, 1886 edition of the Atlanta Journal marked the start of what may be the world's greatest marketing effort:
Delicious! Refreshing! Exhilarating! Invigorating!
The New and Popular Soda Fountain Drink, containing the properties of the wonderful Coca plant [yes, that coca plant] and the famous Cola nuts. For sale by Willis Venable and Nunnaly & Rawson.
Pharmacist John Pemberton purchased this quick-and-dirty promotion for the drink he had invented just three weeks earlier, but it was nothing compared to the marketing blitz to come once true entrepreneurs got their hands on the secret formula. When Coke came under the control of Asa G. Candler, it got an intense promotional push, with sponsorships, branded products, and advertisements plastered on all manner of pre-broadcast media across the U.S. However, it was his 1919 sale of the company to a group of investors that would allow Coke to become a masterful marketing enterprise, because four years after that sale, lead investor Ernest Woodruff installed his son Robert Woodruff at the helm.
Robert Woodruff immediately recognized the ultimate importance of brand quality and brand awareness to the success of what everyone can ultimately agree is a completely unnecessary product. He quickly ramped up advertising expenditures and also spearheaded the creation of some innovative new merchandise concepts, including the now-ubiquitous six-pack, which broadened Coke's reach and made it easier than ever for people to enjoy a cold, refreshing soft drink anytime and anywhere. His efforts during the years surrounding World War II also contributed greatly to Coke's global cachet, as American GIs were frequently kept supplied with Cokes during the war via 64 overseas bottling plants established especially for that purpose. Of course, once the war ended, many Asians and Europeans who had gotten their first taste of Coke from a friendly Yankee could buy a Coke of their own once these plants simply shifted their distribution networks to civilian centers.
After more than a century of advertising evolution, Coca-Cola has grown into one of the world's most dedicated advertisers, with one of the largest corporate ad budgets in the world. In 2010, for example, the company spent nearly $3 billion around the world to make sure its many brands remained front and center in consumers' minds.
Coca-Cola's wide moat has helped provide its shareholders with superior gains in the past, but the company faces some new threats to its continued market dominance. The Motley Fool recently compiled a premium research report containing everything you need to know about Coca-Cola. If you own or are considering buying shares in the company, you'll want to click here now and get started!
The article A Trust-Busting Crusade and a Marketing Masterstroke originally appeared on Fool.com.Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.The Motley Fool recommends Chevron and Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.