What do the companies in these three groups have in common?
Group A: American Motors, Brown Shoe, Studebaker, Collins Radio, Detroit Steel, Zenith Electronics and National Sugar Refining.
Group B: Boeing, Campbell Soup, Deere, General Motors, IBM, Kellogg, Procter and Gamble and Whirlpool.
Group C: Facebook, eBay, Home Depot, Microsoft, Google, Netflix, Office Depot and Target.
All of the companies in Group A were in the Fortune 500 in 1955, but not in 2016.
All of the companies in Group B were in the Fortune 500 in both 1955 and 2016.
All of the companies in Group C were in the Fortune 500 in 2015, but not 1956.
The list of Fortune 500 companies in 1955 is available here and for 2016 here(based on sales the fiscal year ended on or before Jan. 31, 2016). Comparing the 1955 Fortune 500 companies to the 2016 Fortune 500, there are only 60 companies that appear in both lists (see companies in the graphic above). In other words, only 12% (and fewer than 1 in 8) of the Fortune 500companies in 1955 were still on the list 61 years later in 2016, and more than 88% of the companies from 1955 have either gone bankrupt, merged with (or were acquired by) another firm, or they still exist but have fallen from the top Fortune 500 companies (ranked by total revenues). Many of the companies on the list in 1955 are unrecognizable, forgotten companies today (e.g. Armstrong Rubber, Cone Mills, Hines Lumber, Pacific Vegetable Oil, and Riegel Textile).
In my report last year on the 2015 Fortune 500 companies, there were 61 companies in the group that existed in both 1955 and 2015, but Alleghany (№499 last year) dropped from the Fortune 500 list this year because its sales fell and it now ranks №509.
Economic Lessons: The fact that nearly 9 of every 10 Fortune 500 companies in 1955 are gone, merged, or contracted demonstrates that there’s been a lot of market disruption, churning, and Schumpeterian creative destructionover the last six decades. It’s reasonable to assume that when the Fortune 500 list is released 60 years from now in 2076, almost all of today’s Fortune 500 companies will no longer exist as currently configured, having been replaced by new companies in new, emerging industries, and for that we should be extremely thankful. The constant turnover in the Fortune 500 is a positive sign of the dynamism and innovation that characterizes a vibrant consumer-oriented market economy, and that dynamic turnover is speeding up in today’s hyper-competitive global economy.
According to a report released earlier this year by Innosight (“Corporate Longevity: Turbulence Ahead for Large Organizations“) based on almost a century’s worth of market data, corporations in the S&P 500 Index in 1965 stayed in the index for an average of 33 years. By 1990, average tenure in the S&P500 had narrowed to 20 years, fell to 18 years in 2012 and is forecast to shrink to 14 years by 2026. At the current churn rate, about half of the S&P 500 firms will be replaced over the next 10 years as we enter “a stretch of accelerating change in which lifespans of big companies are getting shorter than ever” according to Innosight.
Another economic lesson to be learned from the creative destruction that results in the constant churning of Fortune 500 (and S&P 500) companies over time is that the process of market disruption is being driven by the endless pursuit of sales and profits that can only come from serving customers with low prices, high quality products and services, and great customer service. If we think of a company’s annual sales revenues as the number of “dollar votes” it gets every year from providing goods and services to consumers, we can then appreciate the fact that the Fortune 500 companies represent the 500 companies that have generated the greatest dollar votes of confidence from us as consumers — like Walmart (№1 this year at $482 billion in “dollar votes” for 2016, and №1 in 9 of the last 12 years), ExxonMobil (№2 at $246 billion), Apple (№3 at $233 billion), GM (№8 at $152 billion) and Ford (№9 at $150 billion).
As consumers, we should appreciate the fact that we are the ultimate beneficiaries of the Schumpeterian creative destruction that drives the dynamism of the market economy and results in a constant churning of the firms who are ultimately fighting to attract as many of our dollar votes as possible. The 500 top winners of that competitive battle in any given year are the firms in the Fortune 500, ranked not by their profits, assets or number of employees, but by what is ultimately most important in a market economy:their dollar votes (sales revenues).
Update: In a comment below the post, John Dewey points out that Fortune changed its methodology for the Fortune 500 starting 1995. Between 1955 and 1994, only manufacturing and industrial companies were included. Staring in 1995, both manufacturing and service firms (including retailers like Walmart and financial services firms) were included in the Fortune 500. To account for the change in methodology, an analysis of the change in Fortune 500 firms before and after the change is displayed above.
In the 1955 to 1994 period when only manufacturing firms were considered, there were only 188 Fortune 500 firms in 1955 that survived to be included in the list in 1994, while there were 347 new firms included in 1994 that weren’t on the list in 1955. That’s an average annual turnover rate of 8.5 new firms in the Fortune 500.
In the 1995 to 2016 period when both manufacturing and service firms were considered, there were only 153 Fortune 500 firms in 1995 that survived to be included in the list in 2016, while there were 312 new firms included in this year that weren’t on the list in 1995. That’s an average annual turnover rate of 14.1 new firms in the Fortune 500, and almost twice the turnover rate of the earlier period. At that rate, half of today’s Fortune 500 firms would be replaced over the next 18 years, by 2034, and all of today’s Fortune 500 would be replaced by new firms in 2051. If the turnover rate accelerated to 20 firms per year, half of today’s firms would be replaced by 2028, and the entire Fortune 500 today would be replaced by all new firms in only 25 years, or by 2041.
Despite the change in Fortune’s methodology, the main points above hold: a) there is significant turnover in both the Fortune 500 and the S&P 500 companies, b) that turnover is accelerating over time for both groups, c) the composition of both the Fortune 500 and S&P 500 will be much different in 10 years and 20 years than today, and d) consumers will be the main beneficiaries of the Schumpeterian creative destruction that drives the significant and accelerating turnover in those two groups of 500 firms, as companies engage in intense, cut-throat competition unified by a single goal: deliver maximum value to the consumer to survive, thrive and prosper as a company.