The rocky slope of retailing
When Steve Blum moved from Quaker State to JC Penney Co, he left slow-moving oil for a mercurial world of lightning-fast IR. Welcome to retailing, where sales can be measured hourly and everyone is hanging on your every indicator. Every week JC Penney reports sales performance versus projections, and monthly it issues a formal sales release – a standard in US retailing. 'On a proactive basis, we give the investment community far more information than some companies that don't report with such great frequency may,' says Blum.
'The Street thirsts for information, constantly demanding, What's the latest number on your performance?' remarks Robert Burton, Kmart's investor relations chief. Some retail investor relations officers may rue the monthly sales release, and other industries like automobiles have moved away from such frequent communications. But Burton, who has worked for manufacturing companies in the past, likes it. 'When you communicate with the investment community only once a quarter, anything in between has a fire drill air to it,' he says. 'In retailing, you can move incremental information about business performance in ways that don't necessarily set everyone's hair on end.'
Still, what many IROs have on their lips these days may well 'set everyone's hair on end'. In the UK and continental Europe it's a case of the hunters and the hunted as the era of the global superstore comes into its own. Wal-Mart pounced on the UK's Asda Group in June, acquiring it for $10.8 bn. Then France's Carrefour mated with Promodas in a friendly $16.34 bn deal at the end of August, hoping to strengthen its lead over Wal-Mart in international markets (and prevent the US retailer from getting its paws on Promodès). With everything from convenience stores to 'hypermarkets', the French merger creates Europe's biggest retailer, and a challenger to Wal-Mart in Asia, Latin America and Central Europe.
Wal-Mart is still twice the size of the French Goliath, with $137.6 bn in 1998 sales. But it's barely begun its overseas growth, and non-US earnings are expected to rise from 7 percent of Wal-Mart's total to 25 percent in five years.
Now the race is on, with the French mega-merger accelerating European consolidation. Scratch a store and you'll find a potential merger partner as bigger brands are built, and smaller ones vie to remain free of Carrefour or Wal-mart: France's Casino, Belgium's Delhaize and GIB SA all saw their share prices shoot right up after Carrefour's announcement.
Analysts' favorite pick as a merger partner seems to be Royal Ahold, the Dutch grocer and the world's fifth-largest retailer. In supermarket retailing, confirms Ahold's head of IR, Stuart Brown, 'Consolidation is certainly driving the industry.' So far in 1999 Ahold announced $2 bn worth of acquisitions in the US, Brazil, Argentina, Holland and Spain. As companies build global brands, investors want to know about 'exchange of best practice'. For example, he asks, can Ahold take a customer card that's been successful at one of its Bi-Lo stores in South Carolina and use it in Brazil? Investors also look at whether a company is forcing its brand on the new market, as is Wal-mart's wont, or 'taking a moving train and helping it move better,' as Brown puts it. Ahold's preferred method is the latter. 'For everything related to 'demand' – that's customer – we want the decision-making to be as local as possible. For everything the customer doesn't see – from buying light bulbs for the store to technology systems and distribution – we want to centralize and coordinate exchange of best practice on a global scale as much as we can,' Brown explains.
Kmart, for its part, divested itself of its international businesses, including Europe, Canada, Mexico and others – as well as its domestic specialty retailing businesses: Borders, Officemax, Sports Authority and Builders' Square. Its strategy is to focus solely on being a domestic discount retailer. As Bob Burton explains, it's a turnaround story that saw Kmart shrink from 1995 until 1998 before beginning to grow again.
Burton reports that the lines between 'channels' or segments of retailing are being 'blurred'. 'There is not only consolidation here but also cannibalization. Fortunately for Kmart, we're in one of the channels that's doing the cannibalizing.' Indeed the growth in the discount sector in the US is close to 10 percent annually, well above department stores and mass merchants. Consolidation in this space is already well advanced, with the 'big three', Wal-Mart, Target and Kmart, divvying up 75-80 percent of the discount market. And it's not a zero-sum game – all are showing consistent 'comparable' sales growth. This comes from that 'cannibalization', as all three charge into groceries, opening 'supercenters' that sell food as well as general merchandise.
Under siege
The retailing environment is so frenetic that some IROs, though handling it with aplomb, are like soldiers under siege. Take Stephen Pain at UK-based Storehouse, owner of the Mothercare and BHS chains. In October Storehouse issued a profit warning and promised beleaguered investors it would discuss strategic alternatives when it announced interim results in November. It has now become a hot prospect for acquisition.
'The market dynamics of retailing are shifting very quickly,' Pain says. 'There's the growth of branded goods, for example, and supermarkets are broadening their offerings and offering better value. There's also the increasing globalization of major stores like Wal-Mart and Kingfisher, and as they extend their reach they exert a great deal of buying power. The net effect is to reduce prices and give customers an ever-better deal.'
A major factor influencing the uncertainty of retailing's future is e-commerce. 'It's set to rewrite retailing,' Pain says. 'Investors are wondering how a consumer in any sector is going to spend money. They're preoccupied with companies' ability to compete in very new marketplaces, with a consumer whose spending pattern is changing.'
Some traditional retailers in the US are endeavoring to unlock value in faster growing areas of their business by launching tracking stocks. Office retailer Staples, for example, recently announced plans to create a tracking stock for its online businesses, while other bricks and mortar chains like Toys R Us are considering the same move. The result is that Staples is 'free to lose money' on its internet ventures, says the CFO, while stock options in those businesses will help attract e-commerce personnel. The tracking stock could even be used to acquire other internet companies.
JC Penney plans a tracking stock for its Eckerd drugstores. 'Eckerd is a growth stock, with a separate set of analysts, a separate set of conferences,' says Blum, who says the tracking stock lets JC Penney unlock Eckerd's valuation without losing synergy by doing a spin-off.
Whichever way you look at it retailing's major role in the economy cannot be understated. Overall sales growth is tracked by a number of agencies and reported as a leading economic indicator, for example when the US Commerce Department issues its monthly report on sales growth. And while economists watch retailers for clues, analysts and investors watch the economists – indicators such as the Conference Board's consumer confidence index can signal how stores may perform.
Burton comments that different retailing channels each have their own sensitivities to the economic environment. The early 1990s, for example, showed a lot of sensitivity to economic shifts among specialty retailers, and among mass merchants and department stores to a lesser degree. 'But discounters don't tend to show responsiveness to economic changes.'
The consumer confidence index, he adds, 'comes out and hits the stocks of all retailers.' And investors pay even more attention to interest rates and measures of real income and real spending power. 'Almost every day, in every way, whatever goes on you can relate to retail in some way or other.'
Somehow, amid the constant stream of sales results reporting, IROs at retailers manage to squeeze in an incredible number of investor conferences. These abound in every financial center, all the time. In Paris in October, for example, there were two major get-togethers in two weeks. Probably the world's most important is Merrill Lynch's annual retail conference, held in March in New York. Another event that comes recommended is Sanford Bernstein's June multi-industry conference, 'because you reach investors who may not be expert in retail but who would have an interest in your business,' says one retailing IRO. Then there are road trips for institutions organized by sell-side firms. One of the most popular is that hosted by Jeff Feiner, retail analyst at Lehman Brothers. 'An aggressive, three-day, in-one-store-out-another event,' notes our IRO.
Analyst days are another popular tool for retail IR departments. Kmart held its first one in October, hosting over 100 investors and sell-side analysts for management presentations and a store tour in Rye, New York. 'It was a format in which we could talk in much more depth about the competitive strategy, and expose our management to the investment community in ways you simply can't do otherwise,' says Burton.
Stuart Brown at Ahold agrees that site visits are especially important, and when he wrapped up seven years in Holland to move back to Ahold US headquarters last month, he left analysts and investors nostalgic about the trips they enjoyed with the tall, affable American. He attributes the popularity of Ahold's events to his credo of learning a lot while having a good time. 'It's important to get the sell-side analyst out of the office and into the field. They can learn a lot about the company and the industry by visiting stores and distribution centers and seeing the way customers shop.' Brown recently took a contingent of 35 sell-side analysts on a site visit to Latin America, and also organized a day of presentations by all Ahold's US management teams to about 90 sell-side and buy-side professionals in Washington, DC. He adds that one secret to a good site visit is to leave the logistics to the experts, in Ahold's case Taylor Rafferty. 'It's as complicated as organizing a roadshow,' he says.
Holding a brand
Brown contrasts IR for a brand name company with that of a holding company. Ahold and its Albert Heijn supermarket chain, which has a 28 percent market share in Holland, are practically synonymous. That means 'a much stronger connection between Dutch customers and investors than in the US.' In 1998, after 50 years as a publicly-traded company, Ahold commissioned a study that showed a clear link between investors and customers. For one thing, Ahold investors tend to shop in Ahold's stores, and tend to be better informed than other investors. Ahold has even set up a unique 'customer investment fund', in which shoppers can buy units that are half made up of Ahold stock, with the rest loaned to Ahold at a rate linked to the Dutch treasury rate.
IROs in retailing are very aware of how much their companies are on display for analysts and investors, and they're often stuck in the position of fielding customer complaints from investors. Maybe it's a sullen 'greeter' in a Wal-Mart store, or a missing product at Staples. Brown, for his part, has found himself fielding a special request that a Stop & Shop store be built in a location convenient to where a Boston investor lives. Of course, it's hard to say no. After all, the customer is always right.