by Adam Hartung | Jul 31, 2012 | Current Affairs, In the Whirlpool, Leadership, Lock-in
In a fascinating move this week, Best Buy's septuagenarion founder (who is no longer part of the company) has started calling company execs and offering them jobs – at Best Buy! Apparently he hopes to engage a private equity firm to take over Best Buy, and he wants to keep some of the exec team, while replacing others. Even more fascinating is that at last some of the execs are taking his calls, and agreeing to his "job offer." Clearly these folks have lost faith in Best Buy's future.
This happens one day after the Board of Directors fired the CEO at Supervalu, parent company of such large grocery chains as Albertson's, Jewel-Osco, ACME, Shaw's and Star Markets. Apparently this pleased most everyone, since the company has lost 85% of its equity value since he was brought in from Wal-Mart while simultaneously killing bonuses and even free employee coffee. Even though just last week he was paid a retention bonus by the same Board to remain in his job!
And even thought the Chairman at Wal-Mart was clearly in the thick of bribing Mexican officials to open stores south of the border, there is no sign of any changes expected in Wal-Mart's leadership team.
What is sparking such bizarre behavior in retail? Quite simply, industry leadership that is so stuck in the past it has no idea how to grow or make money in a dramatically changed marketplace. They keep trying to do more of the same, while growth goes elsewhere.
Everyone, and I mean everyone, outside of retail knows that the game has changed – permanently. Since 2000 on-line sales of everything, and I mean everything, has increased. Sure, there were some collosal flops in early on-line retail (remember Pets.com?) But every year sales of products on-line increase at double digit rates. It's rare to walk through a store – and I mean any store – and not see at least one customer comparison shopping the product on the shelf with an on-line vendor.
What 15 years ago was a niche seller of non-stock books, Amazon.com, has become the industry vanguard selling everything from apple juice to zombie memorabilia. Even though most industry analysts don't clump it as a direct competitor to Best Buy, Sears, and Wal-Mart – holding it aside in its own "internet retail" category – everyone knows Amazon is growing and changing shopping habits, and reducing demand in traditional stores.
The signs of this shift are everywhere. From the complete collapse of Circuit City and Sharper Image to the flat sales, reduced number of U.S. outlets and falling per-store numbers at Wal-Mart.
Across America drivers are accustomed to seeing retail outlets boarded up, and strip malls full of empty window space. You don't have to be a fancy analyst to notice how many malls would be knocked down entirely if they weren't being converted to low-cost office space for lawyers, tax preparers, dentists, veterinarians and emergency clinics – demonstrably non-retail businesses. Or to recognize an old Sears or superstore location converted into an evangelical nondenominational church.
For example, in the collar counties around Chicago vacant retail space has accumulated to over 3million square feet – a 45% increase since 2007. In that local market retail rents have fallen to $16.76 per foot, down 29% in the last four years. And this is typical of just about everywhere. America simply has a LOT more retail space than it needs – and will need for the foreseeable future. Demand for traditional retail is going down, not up, and that is a permanent change.
It is not impossible to make money in retail. But you can't do it the way it was done in the past. The answer isn't as simple as "location, location, location;" or even inventory. As the new, and struggling, CEO at JC Penney has learned the hard way, it's not about "every day low price." Or even low price at all, as the former WalMart exec just fired at Supervalu learned – along with all their employees.
Today traditional retail store success requires you have unique products, unique merchandising, sales assistance that meets immediacy needs, strong trend connectivity and effective pricing. Just look at IKEA, Lululemon, Sephora, Whole Foods, Trader Joe's and PetSmart – for example.
Of course there will be grocery stores. Traditional retail will not disappear. But that doesn't mean it will be profitable. And trying to chase profits by constantly beating down costs gets you – well – Circuit City, Toys R Us, Drug Emporium, Pay N Save, Crazy Eddie, Egghead Software, Bradlee's, Korvette's, TG&Y, Wickes, Skagg's, Payless Cashways, Musicland — and Supervalu. There is more to business than price, something the vast, vast majority of retailers keep forgetting.
Fifty years ago if you wanted a TV you went to a television store where they not only sold you a TV, they repaired it! You selected from tube-based machines made by Zenith, RCA, Philco and Magnavox. The TV shop owner made some money on the TV, but he also made money on the service. And if you wanted a washer or refrigerator you went to an "appliance store" for the same reason. But the world changed, and the need for those stores disappeared. Almost none changed to what people wanted – they simply failed.
Now the world has changed again. The customer value proposition in retail is shifting from location and inventory to information. And it is extremely hard to have salespeople – or shelf tags – with comparable information to a web page, which have not only product and price info but competitive comparisons on everything. There simply isn't enough profit in a TV, stereo, PC, CD or DVD to cover the overhead of salespeople, check-out clerks, on-hand inventory and the building.
And that's why Best Buy had to shutter 50 stores in March. On its way to the same ending as Polk Brothers, Grant's Appliance and Circuit City.
Don't expect a 70 year old retailer to understand what retail markets will look like in 2020. Or anyone trained in traditional retail at Wal-Mart. Or anyone who thinks they can save a traditional "retail brand" like Sears. The world has already shifted – and those are stories from last decade (or long before.)
If you are interested in retail go where the growth is – and that is all about on-line leadership. Sell Best Buy and put your money in Amazon. You'll sleep better.
by Adam Hartung | Oct 13, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in
Summary:
- Many large, and leading, companies have not created much shareholder value the last decade
- A surprising number of very large companies have gone bankrupt (GM) or failed (Circuit City)
- Wal-Mart is a company that has generated no shareholder value
- The Wal-Mart disease is focusing on executing the business's long-standing success formula better, faster and cheaper — even though it's not creating any value
- Size alone does not create value, you have to increase the rate of return
- Companies that have increased value, like Apple, have moved beyond execution to creating new success formulas
Have you noticed how many of America's leading companies have done nothing for shareholders lately? Or for that matter, a lot longer than just lately. Of course General Motors wiped out its shareholders. As did Chrysler and Circuit City. The DJIA and S&P both struggle to return to levels of the past decade, as many of the largest companies seem unable to generate investor value.
Take for example Wal-Mart. As this chart from InvestorGuide.com clearly shows, after generating very nice returns practically from inception through the 1990s, investors have gotten nothing for holding Wal-Mart shares since 2000.
Far too many CEOs today suffer from what I call "the Wal-Mart Disease." It's an obsession with sticking to the core business, and doing everything possible to defend & extend it — even when rates of return are unacceptable and there is a constant struggle to improve valuation.
Fortune magazine's recent puff article about Mike Duke, "Meet the CEO of the Biggest Company on Earth" gives clear insight to the symptoms of this disease. Throughout the article, Mr. Duke demonstrates a penchant for obsessing about the smallest details related to the nearly 4 decade old Wal-Mart success formula. While going bananas over the price of bananas, he involves himself intimately in the underwear inventory, and goes cuckoo over Cocoa Puffs displays. No detail is too small for the attention of the CEO trying to make sure he runs the tightest ship in retailing. With frequent references to what Wal-Mart does best, from the top down Wal-Mart is focused on execution. Doing more of what it's always done – hopefully a little better, faster and cheaper.
But long forgotten is that all this attention to detail isn't moving the needle for investors. For all its size, and cheap products, the only people benefiting from Wal-Mart are consumers who save a few cents on everything from jeans to jewelry.
The Wal-Mart Disease is becoming so obsessive about execution, so focused on doing more of the same, that you forget your prime objective is to grow the investment. Not just execute. Not just expand with more of the same by constantly trying to enter new markets – such as Europe or China or Brazil. You have to improve the rate of return. The Disease keeps management so focused on trying to work harder, to somehow squeeze more out of the old success formula, to find new places to implement the old success formula, that they ignore environmental changes which make it impossible, despite size, for the company to ever again grow both revenues and rates of return.
Today competitors are chipping away at Wal-Mart on multiple fronts. Some retailers offer the same merchandise but in a better environment, such as Target. Some offer a greater selection of targeted goods, at a wider price range, such as Kohl's or Penney's. Some offer better quality goods as well as selection, such as Trader Joe's or Whole Foods. And some offer an entirely different way to shop, such as Amazon.com. These competitors are all growing, and earning more, and in several cases doing more for their investors because they are creating new markets, with new ways to compete, that have both growth and better returns.
It's not enough for Wal-Mart to just be cheap. That was a keen idea 40 years ago, and it served the company well for 20+ years. But competitors constantly work to change the marketplace. And as they learn how to copy what Wal-Mart did, they can get to 90%+ of the Wal-Mart goal. Then, they start offering other, distinctive advantages. In doing so, they make it harder and harder for Wal-Mart to be successful by simply doing more of the same, only better, faster and cheaper.
Ten years ago if you'd predicted bankruptcy for GM or Chrysler or Circuit City you'd have been laughed at. Circuit City was a darling of the infamous best seller "Good To Great." Likewise laughter would have been the most likely outcome had you predicted the demise of Sun Microsystems – which was an internet leader worth over $200B at century's turn. So it's easy to scoff at the notion that Wal-Mart may never hit $500B revenue. Or it may do so, but at considerable cost that continues to hurt rates of return, keeping the share price mired – or even declining. And it would be impossible to think that Wal-Mart could ever fail, like Woolworth's did. Or that it even might see itself shredded by competitors into an also-ran position, like once powerful, DJIA member Sears.
The Disease is keeping Wal-Mart from doing what it must do if it really wants to succeed. It has to change. Wal-Mart leadership has to realize that what made Wal-Mart once great isn't going to make it great in 2020. Instead of obsessing about execution, Wal-Mart has to become a lot better at competing in new markets. And that means competing in new ways. Mostly, fundamentally different ways. If it can't do that, Wal-Mart's value will keep moving sideways until something unexpected happens – maybe it's related to employee costs, or changes in import laws, or successful lawsuits, or continued growth in internet retailing that sucks away more volume year after year – and the success formula collapses. Like at GM.
Comparatively, if Apple had remained the Mac company it would have failed. If Google were just a search engine company it would be called Alta Vista, or AskJeeves. If Google were just an ad placement company it would be Yahoo! If Nike had remained obsessed with being the world's best athletic shoe company it would be Adidas, or Converse.
Businesses exist to create shareholder value – and today more than ever that means getting into markets with profitable growth. Not merely obsessing about defending & extending what once made you great. The Wal-Mart Disease can become painfully fatal.
