International Corporate Tax Rates

In a recent annual report, Warren Buffett complained about the disproportionately high share of corporate income taxes that Berkshire Hathaway (BRK) was paying. And paying close attention to what he says, I spent some time looking at the issues involved.

I found that most companies of BRK's size are more internationally diversified. As a result, a wide range of tax planning (or manipulating) is legitimately available. Countries are competing for high quality jobs to be put into their jurisdictions. As a result, the U.S. is now in a group with the highest statutory tax rate at 35%. The others are India, Malta and Spain. The lowest tax rate country is Ireland at 12.5%.

Looking at the likelihood of tax structures is important. A recent study demonstrated that "the effect of a single percentage point reduction in tax rate was the equivalent of the company generating a 15% increase in its sales over a 10 year period." With sales growth generally slow, this shows tax planning has a huge impact. Is there downside to this?

Of course. But after looking around Europe and "the world is flat" thesis, I really think most countries are going to competitively lower corporate tax rates to attract the best working populations and employment opportunities. Technology and pharmaceutical companies should continue to benefit as research employees probably represent highly desirable citizens (high incomes and education levels).

The Foreigness of the Japanese

Recently my family and I were travelling in Europe. While there, it was difficult to ignore the prevalence of natural body odors. Getting back home to reseach, I focused on the geographic differences in the personal care area. But despite the notable difference in smells, the financial differences between the U.S. and Europe personal care segments were only slightly different. The real difference is between Japan and everyone else.

Estee Lauder presented a study comparing the sales of prestige cosmetics to females 15 and older in various markets. It was no surprise that the low end of the scale was held by India with $0.43 per female, next by China at $1.19 per female and up to Russia with $9.03 per female in the developing world. In the developed world, the U.S. and the U.K. were close with $113.22 and $116.96, respectively. The shock was Japan at a whopping $236.82 per female.

Sensing an investable idea, I invested more time in the Japanese cosmetic area and found other facts about the Japanese. 85% of Japanese women between 18 and 65 dye their hair. Only 2.3% of Japanese women between 16 and 64 feel good about their skin. And Japanese women use 50-100% more cosmetic products than other women in the world.

Interestingly, the high expenditures per female seems to have not increased their sense of self worth. Nor have these expenses increased the birth rate or the rate of sexual activity. In a recent survey, the Japanese had, by a huge margin, the lowest rate of sexual activity in the world at 45 times per year against a world average of 103 and a U.S. average of 113.

After this research, I began to sympathize with the management of Colgate-Palmolive (CL). CL views Japan's markets as so foreign that this personal care powerhouse sells only one product in Japan: Hill's pet food.

Will "Alternative" Foods Go Mainstream?

Since Whole Foods built a new store in Highland Park in 2001, I have been a regular at the store. Despite higher prices, I was attracted to a much higher level of cleanliness, a thorough description of food content and the option of no and low fat foods. In the meantime, I watched Tom Thumb close down a recently remodeled store and asked myself, "why don't they sell some of those Whole Food products?"

The recent purchase of 84% of Tom's of Maine by Colgate-Palmolive (stock symbol:CL and founded in 1806) for $100 million points to movement in that direction. Tom's of Maine was started in 1970 by Tom Chappell as a "natural" product category company with deodorants and toothpastes. Last year sales were about $50 million. In light of Tom's high profit margins, it doesn't appear that CL overpaid. Rather, Tom's will get heavyweight distribution and CL will begin to get that product line that Tom Thumb lacked. Winners all around?

Not likely. It looks like Whole Foods may be the ultimate loser through franchise erosion. As production and distribution gets more efficient for Tom's through CL's efforts, other food chains will have the ability to carry such products. While Whole Foods may argue that Tom's should not diminish its brand by selling through inorganic, animal-haters, CL will logically argue that if Tom's is good for the world, why limit its distribution?