• Rich Cohen tells the story of a Russian immigrant, Sam Zemurray, who saw an opportunity in the banana business and seized it. Along the way, he out-hustled and out-innovated the giant of the industry, United Fruit.

• Zemurray’s business life started after seeing his first banana in 1893.

• There were three types of bananas, as far as Boston Fruit (the precursor to United Fruit) was concerned: greens, turnings, and ripes. “Boston Fruit used the following standard: one freckle, turning; two freckles, ripe,” freckles being brown spots.

• Ripes ended up in a pile at dockside. Ripes never got sold, never made it to market, tossed aside as trash, and left to spoil in the sun. Roughly, 15% of banana shipments would end in the ripe pile before refrigeration came around.

• The only thing wrong with ripes was most people wanted to buy unblemished bananas.

• Zemurray saw his opportunity in ripes. His initial plan was to go to Mobile, Alabama, buy a pile of bananas direct from the fruit boats, and haul them back to Selma, Alabama to sell.

• He took $150, all the money he had, bought a few thousand bananas (ripes), rented a partial boxcar, and began a race against time. Whether he made money or not was at the mercy of the speed of the train. He gradually sold his supply at each stop along the way.

• A train brakeman, after hearing his story, suggested he wire the towns ahead to get the word out to grocery store owners, so he could sell his product from the boxcar. Zemurray offered a Western Union telegraph operator a deal (he had no money) — wire every telegraph operator ahead and he’d share a percentage of sales.

• His initial $150 investment after costs, came to a $40 profit — a 27% return — in 6 days.

• “Zemurray had stumbled on a niche: ripes, overlooked at the bottom of the trade. It was logistics. Could he move the product faster than the product was ruined by time? This work was nothing but stress, the margins ridiculously small (like counterfeiting dollar bills), but it was a way in. Whereas the big fruit companies monopolized the upper precincts of the industry — you needed capital, railroads, and ships to operate in greens — the world of ripes was wide open.”

• Zemurray exploited the one area the major players refused to bother with, taking what United Fruit considered trash, and turning it into treasure. He sold 20,000 bananas in 1899, cleared over 500,000 in 1903, and passed a million within a decade.

• By his 21st birthday, 1898 (he was born in 1877), he was worth $100,000.

• By the late 1800s, the banana trade was booming. Like most boom times, it didn’t last. One bad year — 1899 — wiped out most of the banana crop in a series of natural disasters.

• The lessons of 1899 were clear for surviving businesses:

  • Get Big to Survive: A company needed enough capital reserves to survive whatever freak events mother nature threw at it (later on, it would add governments to the list).
  • Control Supply: Own the fields, control the planting, the harvesting, the labor, the governments (if necessary), the costs, the prices, and the supply during down years.
  • Diversify: owning fields across multiple regions, meant a disaster in one region wouldn’t wipe out an entire supply.

• Out of those lessons came United Fruit, the titan of the industry, and Zemurray’s Cayumel Fruit company.

• “The world is a mere succession of fortunes made and lost, lessons learned and forgotten and learned again.”

• In 1903, Zemurray signed a contract with United Fruit that gave him sole rights to all its ripes. At the time, United Fruit shipped half the bananas in the world. He would only expand from there.

• He took on a partner in 1903, Ashbell Hubbard, starting the Hubbard-Zemurray Company with $30,000, which would become Cuyamel Fruit.

• An acquisition spree followed, buying up failed companies for the assets. In 1905, Hubbard-Zemurray bought Thatcher Brothers Steamships and Cuyamel Fruit Company on the cheap. Cuyamel Fruit was a gamble on land deeds in Honduras, but the boats opened the door to importing bananas himself.

• In 1910, Zemurray started buying as much land as he could in Honduras for his first banana plantation, to better control his supply. It was all from borrowed money, sometimes from nefarious lenders at ridiculously high rates.

• He took full control of Cuyamel Fruit, buying Hubbard’s 45% share, giving Zemurray 90%, with United Fruit owning the 10%. Hubbard couldn’t handle the risk Zemurray was taking piling up debt to buy as much land as possible.

• The Knox plan, an agreement to buy and refinance Honduran railroad bonds by J. Pierpont Morgan, jeopardized Zemurray’s plans in Honduras. The plan, if ratified would add up to a penny per bunch the Zemurray’s costs, making it impossible to stay in business. The only solution was to fund a coup via revolution, won in 1911. By 1912, Zemurray’s settlement with the new government of Honduras included duty-free imports, no taxes, a $500,000 loan to repay funds for the revolution, and 24,700 acres to be claimed later.

• In 1913, Zemurray bought back the 10% stake in Cuyamel held by United Fruit.

• Zemurray was a stickler for reputation. He believed his association with United Fruit damaged his reputation after United Fruit boycott by Nicaraguan banana growers (United Fruit used Cuyamel ships, instead of UF ships, to get around the boycott). Being totally independent was the only way to repair his reputation.

• By 1915, he was buying up ships and adding refrigeration for more control over transportation. He also started diversifying with land — in Nicaragua and Mexico — and products — coconuts, pineapple, palm oil, cattle, timber, sugarcane — to hedge against natural disaster and market conditions. Cuyamel survived WWI thanks to sugarcane.

• He redeemed his Honduran land claim in 1915 — his new 24,700 acres bordered United Fruit land, putting the two companies in direct conflict. The land grab and resulting conflict would trigger a merger of the two companies 14 years later.

• By 1925, Cuyamel was debt free.

• Zemurray was a farmer at heart, preferring to be on the ground, working the plantation with the other workers. That gave him an advantage over other companies, like United Fruit, with suits who ran their companies a world away.

• Despite being the small fish up against the behemoth of United Fruit, Zemurray had created a startup that could run circles around the bloated bureaucracy. He was more efficient, more innovation, more nimble, had a happier higher skilled workforce, and it all resulted in higher profit margins.

• His banana innovations produced bigger, fatter, better bananas (most seem obvious today, but it is new back then and looked on as unnecessary or crazy):

  • Selective Pruning: cut runts and dwarfs from bunches while still growing on the tree.
  • Drainage: improved drainage with canals and spillways.
  • Silting: purposely flooded fields because silt made an excellent fertilizer.
  • Staking: tied trees to bamboo to protect against high winds.
  • Overhead Irrigation: watered during the dry season since rain was consistent year round.

• In December 1929, Zemurray would merge Cuyamel with United Fruit in a stock swap. Zemurray received 300,000 shares in United Fruit, valued at roughly $30 million, making him the largest shareholder in the company.

• He briefly retired from the business after the merger thanks to a standard noncompete clause. - He spent his short-lived retirement as a philanthropist (and returned to his philanthropic ways in a big way following WWII).

• By 1932, United Fruit stock had collapsed — $100/share in 1929 were trading at $10.25 in 1932. UF management was doing everything to lower costs, save their jobs, and it threatened the companies survival.

• Zemurray led and won a proxy fight for control of United Fruit in 1933. He went door to door talking shareholders and collecting their votes to oust management. Time reported the meeting this way: “One day last summer Samuel (“Sam”) Zemurray of New Orleans strode belligerently into a room at No. 1 Federal Street, Boston, where the directors of the potent, far-flung United Fruit Co. were holding a meeting. Down on the long table from his old enemy, President Victor Macomber Cutter, he flung a handful of proxies. Said he: “You’ve been fucking up this business long enough. I’m going to straighten it out.""

• He would remake United Fruit in the image of Cuyamel by cutting out bureaucratic overlap and waste. He said, “I realized that the greatest mistake the United Fruit management had made was to assume it could run its activities in many tropical countries from an office on the 10th floor of a Boston office building… The management had tried to tell every executive in every country exactly what he must do and how he must do it. Executives on the spot were treated like messenger boys. I completely reversed that policy. I laid down what might be called a constitution for the company. This constitution provided for a maximum of home rule in the field. It was established as a fixed policy that if [a plantation manager] could not handle his difficulties reasonably satisfactorily, we would appoint some man who could.” He sold ships, rented space in other ships, left fields farrow to control prices, diversified into other products like sugarcane, pineapples, and quinine trees.

• By 1933, sentiment on United Fruits stock was turning, the price was up to $26/share.

Zemurray would lead the company until 1951. He sold all his shares of United Fruit upon retirement.

• Banana Facts:
  • The banana tree is an herb, not a tree.
  • It can grow up to 20 inches in a day in perfect conditions, up to 30 feet tall.
  • It’s the largest plant without a woody trunk, that grows from a rhizome.
  • The bananas — the fruit — come at the end of a cycle. It can bear fruit year round.
  • Bananas are a type of berry.
  • The trees only bear fruit (i.e. berries — bananas) in the tropics, with two exceptions — Iceland, on a volcano’s slope, and Israel, for a yet unknown reason.
  • The rhizome, much like a potato, can be divided up and replanted to grow more banana trees.
  • There are no seeds. To get more trees, you split the rhizome and replant each cutting. In that sense, each rhizome cutting is a clone of the primary tree.
  • The rhizome cuttings — the cloning — are its great strength and weakness from a business perspective.
  • Strength: cheap, low-cost production growth with total uniformity between plants.
  • Weakness: highly susceptible to disease. Since every banana tree is a clone, if one tree is susceptible, all species of that type are susceptible. There’s also poor weather (natural disasters) to deal with.
  • The Big Mike was the first species of banana to be imported on a mass scale and the first to be wiped out by disease.
  • The Cavendish species is currently the mass import and also battling extinction.
• United Fruit Facts:
  • Also known as El Pulpo, the Octopus, because its tentacles reached everywhere.
  • Founded in 1885, as Boston Fruit, by Lorenzo Baker, Andrew Preston, and 10 other investors who put up about $1,500 each.
  • By 1897, Boston Fruit had $4 million in assets and couldn’t keep up with demand.
  • Boston Fruit turned bananas into a volume business. Low prices were key to sales and lack of supply risked higher prices — the only way to control prices was to get much bigger.
  • By 1899 — the worst year for bananas — Boston Fruit controlled 75% of the market. And it wasn’t big enough. It needed to diversify across different regions to protect itself from a repeat of 1899.
  • On March 30, 1899, United Fruit was born. Boston Fruit merged with Keith Minor’s Tropical Trading & Transport Company, giving the company $20 million, 212,349 acres across 6 countries, and 184,000 unsold shares to entice independent companies to join United Fruit. 27 small companies seized on the offer of security with United Fruit in the first 6 months.
  • United Fruit purposely kept its ownership in the independent banana companies to 49%, to avoid anti-trust concerns.
  • By 1908, it shipped 60% of all bananas to the US, 36 million stems.
  • The first anti-trust lawsuit against United Fruit reached the Supreme Court in 1909 and failed. Too much of United Fruit’s business, being done overseas, couldn’t be judged by US law alone. The majority opinion in a nutshell: local law (non-US) allowed it so it wasn’t unlawful. Any other decision would have had an unknown ripple effect across multiple countries.
  • By 1910, the company owned 115 ships (one of the largest navies in the world) that carried not only bananas but mail and cargo of Central America. The company had the power to control the region just by shutting down the ships.
  • The 1929 merger with Cuyamel Fruit, gave United Fruit 68% market share.
  • The company would hit its peak around 1940, under Zemurray’s leadership, with a workforce of 100,000.
  • United Fruit orchestrated a successful coup (under Zemurray) in Guatemala, with the backing of the US government, in 1954. It triggered the beginning of the end for the company.
  • “At the time of the coup, U.F. led its industry by every measure: in profits, market share, volume (and it wasn’t even close). Within a generation, it would trail Standard Fruit in nearly every category. The overthrow had all the ingredients of irony: meant to prevent the establishment of a Communist beachhead in the hemisphere, it would help create just such a beachhead in Cuba. Meant to make Guatemala friendly for the company, it would engender such hostility that the company was eventually forced to abandon the isthmus altogether.”
  • Antitrust laws hit the company again in 1958. The company lost. The agreed settlement would create a competitor at 1/3 the size of UF in Guatemala. UF would have to sell 33% of its assets to an independent company — Del Monte, #3 in market share, became the buyer.
  • It dropped out of first place in market share within a few years and the company would spiral from there.
• “A corporation ages like a person. As the years go by and the founders die off, making way for the bureaucrats of the second and third generations, the ecstatic, risk-taking, just-for-the-hell-of-it spirit that built the company gives way to a comfortable middle age. Where the firm had been forward-looking and creative, it becomes self-conscious in the way of a man, pestering itself with dozens of questions before it can act. How will it look? What will they say? If the business is wealthy and strong, the executives who come to power in these later generations will be characterized by the worst kind of self-confidence: they think the money will always be there because it always has been.”
• “The company brain is hardwired. Which is why a corporation, though conceivably immortal, tends to have a life span, tends to age and die. Unless remade by a new generation of pioneers—in which case it’s a different company—most corporations do not outlive the era of their first success. When the ideas and assumptions prevalent at the time of their founding go out of fashion, the company fades.”

Quotes

“A corporation ages like a person. As the years go by and the founders die off, making way for the bureaucrats of the second and third generations, the ecstatic, risk-taking, just-for-the-hell-of-it spirit that built the company gives way to a comfortable middle age. Where the firm had been forward-looking and creative, it becomes self-conscious in the way of a man, pestering itself with dozens of questions before it can act. How will it look? What will they say? If the business is wealthy and strong, the executives who come to power in these later generations will be characterized by the worst kind of self-confidence: they think the money will always be there because it always has been.”

“The company brain is hardwired. Which is why a corporation, though conceivably immortal, tends to have a life span, tends to age and die. Unless remade by a new generation of pioneers—in which case it’s a different company—most corporations do not outlive the era of their first success. When the ideas and assumptions prevalent at the time of their founding go out of fashion, the company fades.”

“At the time of the coup, U.F. led its industry by every measure: in profits, market share, volume (and it wasn’t even close). Within a generation, it would trail Standard Fruit in nearly every category. The overthrow had all the ingredients of irony: meant to prevent the establishment of a Communist beachhead in the hemisphere, it would help create just such a beachhead in Cuba. Meant to make Guatemala friendly for the company, it would engender such hostility that the company was eventually forced to abandon the isthmus altogether.”

“Zemurray had stumbled on a niche: ripes, overlooked at the bottom of the trade. It was logistics. Could he move the product faster than the product was ruined by time? This work was nothing but stress, the margins ridiculously small (like counterfeiting dollar bills), but it was a way in. Whereas the big fruit companies monopolized the upper precincts of the industry — you needed capital, railroads, and ships to operate in greens — the world of ripes was wide open.”

“The world is a mere succession of fortunes made and lost, lessons learned and forgotten and learned again.”

References

• novelinvestor summary