The idea of a public company run as a private family business might raise eyebrows. It suggests a lack of transparency or accountability. But that was how Richard Smith ran General Cinema for four decades — and in that time, the company's performance outstripped the S&P 500 by more than elevenfold.
IMO, there are lots of interesting concept instantiations in this case:
Incentive design:
General Cinema incentivised key employees through equity options and a stock purchase program in which the company matched employee investments up to a set maximum level. (emphasis added) In an interview with author William Thorndike, Ive said that top executives: “felt like owners…we were all shareholders and behaved as such.” This sentiment was echoed by Smith himself, who said he would retire by the age of 65 because he believes in “upward mobility for executives. I think if you don’t offer them upward mobility, a lot of their motivation is reduced or destroyed.” Of course, he was quick to add: “I have a very large family investment in the company. I can’t conceive as long as I’m breathing that I’m going to be exactly out of it.”
That’s certainly one way to incentivise employees with equity without diluting existing shareholders (e.g. the typical stock option equity argument that Buffett and Munger hate so much).
Also, check out the scale economies on the second line of business Smith acquired:
As ABC grew, Smith realised that what he had was, essentially, a platform company: a business that he could add other businesses to easily and efficiently. ABC was developing scale advantages as it grew, which meant that Smith could acquire Pepsi franchises at ostensibly high cash flow multiples, and then use ABC’s scale to effectively lower the purchase cost through reduced expenses in production, marketing and taxes. This was the oft-cited but rarely observed ‘cost synergies’ argument, typically trotted out by M&A advisors. Except — in this case at least — the cost savings were real. For instance, General Cinema negotiated for lower can prices across the entire portfolio of companies (scale advantages!) and reduced sugar costs by purchasing off international markets … in order to avoid paying an importer’s markup.
Once he had this insight, Smith exploited it aggressively: through the 1970s, Smith bought up several Pepsi franchises, including American Pepsi in 1973, Pepsi Cola Bottling Company in 1977, and the entire Washington, DC franchise in 1977. Occasionally, General Cinema even snagged the odd 7-Up or Dr Pepper outfit. He embedded the company firmly in the beverage industry by partnering with the largest orange growers cooperative to launch Sunkist orange soda in 1976. (ABC’s original investment in Sunkist was $20 million, and it was sold two decades later for $87 million, an excellent return on investment.)
To take a step back: what seems somewhat notable to me is that GCC didn’t seem to have a moat at the conglomerate level, to reuse @ajzitz’s analysis.
And so it’s no surprise that it was sold for parts at the end — though I think ultimately to the average GCC shareholder’s benefit.