Philippa Kaur

WITH HIS long white coat, stethoscope, genially soothing manner and wonky eagerness to discuss “population health management” and “patient-centred” medicine, Ronald Searcy seems the Platonic ideal of a primary-care doctor. The most unusual thing about him is where he works: a compact facility complete with examination rooms, dentist’s office, phlebotomy lab and X-ray room tucked into a Walmart in north-west Arkansas. Since 2019, Walmart has opened 32 of these “health centres” in five states; by the end of next year it plans to more than double that number, and expand into two more states.Walmart is not the only big company expanding its medical offerings. Earlier this year Amazon acquired One Medical, a concierge practice (meaning clients pay an annual membership fee) with offices in cities across America. Dollar General, a discount retailer, has set up a partnership with DocGo, which runs mobile health clinics, and has launched a pilot programme at three shops in Tennessee. Walgreens and CVS, both retail pharmacies, have robust primary-care offerings; last year more than 5.5m patients visited a CVS MinuteClinic, making it one of the biggest providers in the country, and earlier this year CVS completed its acquisition of Oak Street Health, an elderly-focused primary-care provider with offices in 21 states. What do these companies see in the medical business? The answer, befitting America’s byzantine and rent-filled health-care system, is both simple and complex.The simple answer is money. Americans spend a stunning amount of it on health: roughly 18% of GDP in 2021, far exceeding the rich-country average of about 10% and more than double the ratio of some, such as South Korea, with healthier and longer-lived populations. Americans’ spending is forecast to rise by 5.4% per year over the next eight years (see chart), outpacing broader economic growth and accounting for almost one-fifth of GDP by 2031. The bulk of that spending will come from Medicaid and Medicare, federal programmes that cover health-care costs for, respectively, poor people and over-65s.The complex part reflects changes in how insurers, including Medicaid and Medicare, pay for coverage; as well as changes in how consumers are willing to get it. Start with the insurers. The predominant payment model is fee-for-service, in which insurers reimburse doctors for each visit or procedure. Its advantage is simplicity. Its downside is that it encourages medical consumption but, for the most part, is indifferent to outcomes: doctors get paid the same amount whether a patient gets healthier or not.From 2016 to 2021, however, the share of health-care spending on “alternative payment models” rose from 29% to 40%. In a survey in 2022 most payers believed that these payment models, in particular those that let doctors share in the upside of keeping patients healthy, would rise. This approach, known as “value-based care,” (VBC) is an artefact of the Affordable Care Act. It incentivises doctors to keep patients healthy—for instance, by letting them share in savings if a patient with a chronic condition takes her medication and stays out of hospital—rather than simply paying them for every procedure performed. Companies are betting that they can make more money on this model than the old one.Retailers entering or expanding their primary-care offerings are also betting on consumer habit. The most recent Consumer Pulse Survey by Accenture, a consultancy, showed that nearly one-third of consumers—and more than one-third of those between 18 and 35—were open to getting medical care at a grocery store or big-box retailer, and more than 90% of customers would trust a retailer with their medical data. Retailers believe that this sort of trust, along with their convenience (75% of Americans live within five miles of a Dollar General, and 90% within ten miles of a Walmart) is a winning combination.Better technology improves VBC, both by giving insurers more health measures to judge a doctor’s success, and by providing doctors with a better way to stay in touch with their patients. Walmart Health and OneMedical, for instance, use apps that show patients their medical history, including upcoming appointments and when they need to repeat their prescriptions. Both these companies also have in-house pharmacies to which they can direct patients. And the primary-care doctor is the de facto co-ordinator and gatekeeper for a patient’s whole medical care. Some worry that VBC could provide an incentive for insurers to deny referrals and necessary care, and keep the savings. But if the patient gets sicker, they share those costs too.Managing that downside risk will be tricky. The sort of proactive care and patient contact that VBC requires may be cheaper with a smartphone than without one, but it is not cheap. Providers need to invest in technology, but may also need to keep on top of patients with repeated phone calls and home visits—the sorts of things that apps cannot do. Firms that get it wrong will struggle. Those that get it right will rake in their share of the immense tide of money sloshing around America’s bloated and inefficient health-care system, and may also, incidentally, keep people healthier.■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

The king is dead. ¡Viva el rey! That is the cheer ringing through drinking dens this summer as Bud Light, America’s self-styled “king of beers” for 22 years, is dethroned by Modelo Especial, a Mexican brew. Spare a thought for the vanquished. Rarely has an effort to rejuvenate a brand gone as spectacularly wrong as when Bud Light’s marketers entered into a liaison with a transgender social-media star, only to fall victim to America’s culture wars. On the bright side, it offers a chance to examine a little-known success story. Constellation Brands, an American firm that went into brewing only a decade ago, offers a lesson in how to wage an old-fashioned corporate insurrection, Mexican-American style.Schumpeter should declare an interest. Having lived for many years in Mexico, parts of his life have been spent accompanied by one Mexican brew or another. Modelo Especial was rarely one of them. South of the border, it doesn’t have huge cachet. Yet in America the same beer, with the same taste, has overtaken even Corona Extra, its better-known sister brand. That is because, in straightforward business terms, Constellation got everything right, from manufacturing to distribution to retailing. Most of all, it grasped the growing power of the Latino consumer. The Modelo Especial story starts with antitrust. Not the newfangled sort in which size itself is considered taboo, but the old-school idea that buying a competitor can lead to higher prices. It dates back to 2013, when AB InBev, the Belgium-based owner of Budweiser, paid $20bn to take control of Grupo Modelo, Mexico’s largest brewer, whose brands such as Corona and Modelo Especial were rivals to Bud Light north of the border. America’s Justice Department intervened. It determined that, in order to maintain competition, AB InBev should divest Modelo’s entire US business to Constellation, which was then a relatively little-known wine and spirits seller worth $8.1bn. (AB InBev kept the Grupo Modelo business in Mexico and the rest of the world.) Today Constellation is worth $45bn and is one of the most respected consumer-goods companies in America.Bump Williams, a consultant who first noticed that in the four weeks to June 3rd, at-home sales of Modelo Especial had shot past Bud Light in dollar terms, uses a vivid expression to describe the way Constellation nurtured the brand. He calls it “feeding the hot hand”. When the company noticed that the beer was taking off, it did not let a perception that Corona was the front-runner distract it. It threw its weight behind the mood of the marketplace.Its priority was to ensure that supply met demand. That involved making a huge bet on Mexico. When Constellation acquired the brands, it resolved to brew them south of the border. Since then it has increased its production capacity in Mexico fourfold, at a cost of $6.4bn—more than the $4.8bn it paid for the brands in 2013. It is not stopping there. It plans to invest up to a further $4.5bn over the next three fiscal years, boosting capacity by more than 70%. Investing in Mexico has not been without setbacks. In 2020 protesters, backed by Andrés Manuel López Obrador, Mexico’s populist president, voted in a plebiscite to stop Constellation from building a factory close to the border because of concerns about water shortages. So it moved the factory to Veracruz, on Mexico’s wetter east coast, with the president’s blessing.Distribution in America was the next challenge. To start with, Constellation focused on bringing Modelo Especial to a few cities with big Hispanic communities, such as Los Angeles and Chicago. After the brand took off there, it expanded farther afield. It built brand awareness one step at a time and worked closely with its distributors to ensure that supply kept flowing. Once in shops, Constellation focused on showcasing the Modelo brand. “They’re wine guys, they know the value of display,” says Mr Williams. They also got pricing right. Instead of foisting large increases on consumers, Constellation made incremental price rises. For many years, Modelo Especial has been the fastest-growing beer in America, says Scott Scanlon of Circana, a market-research firm. Yet more impressive is that it is a premium brand, rather than a budget one, at a time when wallets are stretched—and a full-bodied beer, rather than a low-calorie one, when waistlines are. The reasons for its consumer appeal are twofold. First is advertising. Unlike Bud Light’s, it is not gimmicky. It tells stories of ordinary people who have overcome hardship. That has helped it pull off the trick of remaining authentically Mexican even as it joined the big-beer league. Second is the market itself. Its core consumers are Latinos, who have growing economic power in America. According to McKinsey, a consultancy, it is not just their population that is increasing faster than the American average. So is their spending power. If America’s Latinos were their own country, they would have had the third-fastest growing economy after China and India during the past decade.The flamin’ hot handThis power may cast a halo effect on other products of Mexican descent. Tequila looks likely to overtake vodka as America’s best-selling spirit. Grupo Bimbo, a Mexican multinational that is America’s biggest baker is, like Constellation, a respected consumer-goods company. In a sign of the times, a new film, “Flamin’ Hot”, tells the story of how a Mexican-American janitor convinced Frito-Lay, owned by PepsiCo, to produce spicy Cheetos to win over the Hispanic market, reviving its business. (The snack’s true genesis is disputed, but its popularity is in no doubt.)Modelo Especial may yet lose its crown as Bud Light gets over its current crisis. Yet the fizzing growth of the Mexican-American brand suggests it could eventually gain a more lasting lead. It is lamentable for business in general that America’s cultural divide has done so much damage to Bud Light’s reputation. But the consolation is that Modelo Especial’s success suggests the cultural divide between America and Mexico is narrowing. ■Read more from Schumpeter, our columnist on global business:What Tesla and other carmakers can learn from Ford (Jun 13th)What TIM’s mega-spin-off reveals about Europe’s telecoms industry (Jun 8th)Australia and Canada are one economy—with one set of flaws (Jun 1st)Also: If you want to write directly to Schumpeter, email him at [email protected]. And here is an explanation of how the Schumpeter column got its name. More

REVENGE HOLIDAYS are in full swing and the travel industry is cashing in. After a rocky few years, the urge to splurge on airline tickets and hotels is set to bring in bumper earnings. Tour operators are inundated with bookings; hotel chains are raking in record profits. EasyJet has raised its earnings forecasts twice this year; IAG and Ryanair have both returned to profit for the first time since the start of the pandemic, and Singapore Airlines is handing out some of its record profits as bonuses worth eight months’ salary. With air fares rising faster than inflation, global airline bosses now expect $9.8bn in net income this year, more than double the amount initially forecast, according to the International Air Transport Association, an industry body. The holiday boom has lifted the outlook for international travel. Worldwide tourist arrivals this year are expected to reach up to 95% of pre-pandemic levels, up from 63% in 2022, estimates the UN’s World Tourism Organisation. Share prices of travel companies, which tumbled in early 2022 amid fears of rising inflation and a looming recession, are soaring again (see chart). High prices have not deterred sunseekers so far. “People are prioritising travel over other discretionary spending,” says David Goodger of Oxford Economics, a consultancy. Still flush with cash saved during lockdowns, many are splashing out on holidays, even as they trim spending on clothes or dining out. A few factors will determine how long the good times roll on for. Some have to do with the industry’s supply side: shortages of airport staff, soaring jet-fuel costs and crumbling IT systems, which buckled under the weight of demand last year, leading to hours-long flight delays or cancellations at short notice. A quarter of all flights in America were scrapped or delayed last summer. Such meltdowns erode trust. They are also costly. Southwest Airlines estimates that the cancellation of nearly 17,000 flights in December led it to incur around $800m in losses.A bigger question concerns demand. After a glorious summer, appetite for holidays could come crashing down as fast as it has risen. Although America’s Federal Reserve has paused interest-rate rises, it is expected to lift rates again in coming months. As the Fed and other central banks in rich countries keep fighting stubborn inflation, holidaymakers may eventually throw in the beach towel. Chinese tourists, the third-biggest group after Americans and Germans in 2019, according to Oxford Economics, may not pick up the slack. Since covid restrictions in China were eased last year, nearby destinations such as Macau and Thailand have proved popular. Yet Chinese enthusiasm for far-flung spots remains tepid. Accor, a hotel giant, estimates that around three-quarters of Chinese travellers this year will opt for “staycations” instead. A lull in holidaymaking would be bad news for a heavily indebted industry already facing escalating expenses and recovering from past losses. Airlines alone lost $138bn in 2020. Moody’s, a credit-rating agency, expects their labour costs to increase by nearly a fifth this year. More

ANYONE ASKED to come up with their favourite literary home is spoiled for choice: Pemberley, Brideshead, Blandings, Jay Gatsby’s mansion, to name a few. The same holds true for workplaces on television: Los Pollos Hermanos, Dunder Mifflin and the swish Waystar Royco offices, for instance. Ask someone to come up with their favourite fictional storage unit, and expect a blank stare (the most ardent Neal Stephenson fans may recall the one where Hiro Protagonist lives in “Snow Crash”).Ubiquitous and unremarkable, self-storage solves a deeply American problem: what to do with too much stuff. A bunch of empty rooms near a highway is not the sexiest part of a property portfolio. Yet few property assets have matched their performance lately (see chart).One reason is more people moving house. (Ron Havner, former boss of Public Storage, the biggest self-storage firm, said that people seek his services for “the four Ds”: death, divorce, disaster and dislocation.) Amid covid-19, anyone living in a house or flat with no spare rooms had to convert an existing one to a home office or gym. That meant clearing out whatever was there. Many were reluctant to bin things, especially early on when nobody knew how long self-isolation would last. The alternative was to stash it in storage. Over the past three years self-storage occupancy rates have risen from around 90% to as much as 96%. Demand has been especially high in Florida, Texas and the sunbelt, where people flocked in search of larger homes and laxer lockdowns.High demand, in turn, has given landlords pricing power. Rent bumps went from around 8-9% every six months before the pandemic to as much as 35%, according to Spenser Allaway of Green Street, an advisory firm. Facilities managers can get away with this because customers tend to be “sticky”: they may shop around and choose a facility based on price and proximity, but once their stuff is in they seldom bother moving it. As Stephanie Wright of New York University explains, “Individuals tend to think, ‘I’ll park my stuff here for a month or two,’ but the average rental duration is in excess of a year.” Storage firms have also embraced dynamic-pricing software. Knowing up-to-the-minute market rates allows them to avoid undercharging customers. This is of a piece with the sector’s operational efficiency (a small staff keeps labour costs low; preparing a unit for a new customer requires little more than a quick sweep) and with its drive to modernise. Indoor, climate-controlled facilities are becoming the norm. “The days of the old drive-up with a rickety fence and a Doberman for a security system, that’s not going to cut it anymore,” says Tim Garey of Cushman Wakefield, a property consultancy.The last factor behind self-storage’s outperformance is constrained supply. Whereas the amount of available square footage rose by more than 15% from 2016 to 2019, labour shortages, high construction costs and supply-chain snags have limited new construction in the past few years. That may change as these bottlenecks ease. Even then, the self-storage business may slow but not collapse. As long as Americans keep buying things, they will continue to need places to put it. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

THE 2023 finals of America’s National Basketball Association (NBA) and Europe’s football Champions League were both history-making events, in rather different ways. On June 12th the basketball contest crowned a small-city team that had never before won a championship, the Denver Nuggets. They defeated an unlikely challenger in the Miami Heat, the last-seeded team in its conference of eight. Had Miami won, that would have been a first for such a lowly side. Meanwhile, the UEFA Champions League final, held on June 10th, featured a powerhouse from Britain, Manchester City, defeating a mainstay of European football, Italy’s Inter Milan. Listen to this story. Enjoy more audio and podcasts on More

An idea to run up the flagpole: jargon gets an overly bad press. Not the kind of jargon that involves using the words “flagpole” and “run up”, but the kind that binds teams together. The kind that is exemplified by the term “nub”. In the very unlikely event that you find yourself on board a submarine but are not a member of the crew, you will be a nub. Listen to this story. Enjoy more audio and podcasts on More

RARELY DO GERMANY’S top economists see eye to eye on a big economic-policy controversy. But when it comes to the government’s decision to spend billions on subsidies for Intel’s mega semiconductor factory in Magdeburg, Reint Gropp of the Halle Institute for Economic Research, Marcel Fratzscher of the German Institute for Economic Research and Clemens Fuest of the Ifo Institute all agree. They consider lavishing billions on the American firm a spectacular waste of taxpayers’ money. Listen to this story. Enjoy more audio and podcasts on More

AT 78 LARRY ELLISON, the co-founder and chairman of Oracle, a business-software firm, is still brimming with energy. During the company’s latest quarterly earnings call on June 12th the septuagenarian rhapsodised youthfully about artificial intelligence (AI) and the latest cloud-computing technology. He has good reason to be in high spirits. Over the past year Mr Ellison’s wealth has rocketed to nearly $150bn, according to Forbes, a magazine that tracks such things, on the back of Oracle’s soaring share price. On June 13th Mr Ellison briefly passed Jeff Bezos, who founded Amazon, as the world’s third-richest man.Like Mr Ellison, Oracle might be seen as a dinosaur of American tech. It began life in 1977 as a database-software business, later expanding into applications for business functions such as finance, sales and supply-chain management. As a latecomer to the cloud, however, the business has ceded market share in recent years to Amazon, Google and Microsoft, three cloud giants that have aggressively expanded their business-software offerings. Oracle’s slice of the database-software market, which remains its bread and butter, fell from 43% in 2012 to 19% in 2022, according to Gartner, a research firm.Now the business looks to be turning a corner. To catch-up with rivals, it has been investing heavily in cloud computing. Capital expenditures in the past 12 months added up to $8.7bn, or 17% of sales, up from just 5% two years ago. Last year it acquired Cerner, a cloud-based health-records business, for $28bn. The upshot has been significant growth in sales of its cloud-based products, which were up by 33% year on year in the most recent quarter, or 55% after including the Cerner acquisition. They have grown much faster than the cloud divisions of Amazon, Google and Microsoft. Oracle also outwitted them to snatch the cloud contract to host the American operations of TikTok, a Chinese-owned short-video app to which millions of youngsters are glued. Investors like what they see. Oracle’s shares have gained in value by 73% over the past 12 months, well ahead of the tech-heavy Nasdaq index (see chart). The company’s market capitalisation is $315bn, making it the world’s fourth-most-valuable business-software maker, behind Microsoft, Alphabet (Google’s parent company), and Amazon. Mr Ellison’s company is now looking to cash in on the latest craze in tech: generative AI of the sort that powers chatGPT and other content-creating bots. In March it became the first cloud provider to offer access to the DGX Cloud, a supercomputer designed by Nvidia, an American chipmaker, specially for training AI models. During the latest earnings call Mr Ellison announced that Oracle will also be launching a new service with Cohere, an AI startup in which it recently took a stake, to help clients use their own data to build specialised generative-AI models. Meanwhile, the firm is embedding generative-AI features into its various business applications.There is one potential snag. Over the past five years Oracle has returned $100bn in cash to shareholders through share buy-backs, reducing its share count by around a third. Mr Ellison, who has held onto his shares, has been among the biggest beneficiaries—his slice of the company jumped from 28% to 42% in the period. To fund those repurchases, and its cloud investments, the company has taken on hefty debts. Its net debt is now more than four times its earnings before interest, tax, depreciation and amortisation (a figure above three is considered risky). Indeed, the firm’s debts now exceed the book value of its assets, leaving it with negative shareholder equity on its balance-sheet, a telltale sign of dangerously high leverage.For now, the company has time on its hands. Fixed interest on its debts mean it has suffered little from rising benchmark rates. Its corporate bonds are priced by the market at a yield of 5.7%, but require coupon payments of only 3.8%. And only one-fifth of its debt will mature in the next three years. In recent quarters it has slowed share repurchases and started to chip away at its debt mountain.The hope will be that the heavy investments made in the past two years will allow the company to grow out of its debt. If it pays off, Mr Ellison may durably displace Mr Bezos on the world’s rich list. Either way, Oracle will not be going extinct any time soon. ■ More