Apr 06 2010
on Loblaw and Canadian Grocery Stores
Canadian companies are holding onto their cash, saying things like “cash is king” and waiting out the recession. Then they take turns being surprised the US companies are gaining market share. Part of how “holding onto cash” actualizes is that they’re not paying dividends, and few companies in either country are buying back stock.
Since this is and always has been primarily a crisis of consumer confidence, purchasing isn’t increasing in line with expectations, and the corporate purse strings are remaining tight. The population sees too much risk in this recovery—not enough of them believe that significant growth is to be expected in the short term, and therefore there is little demand for the distribution of surplus revenues.
George Weston, the parent company of Loblaw, is “likely” to use every excess dollar for acquisitions rather than dividends. As we’ve learned, Weston does a lot of acquisitions. This, of course, reflects the current personality of the company as much as economic drivers. But companies in aggregate do not want to create or perpetuate a precedent of high dividends while there is still significant risk in the economy—read: significant risk that similar dividends will not be able to be paid next year.
One analyst notes that Weston’s insistence on acquisitions coupled with an inability to find suitable targets for acquisition is the primary reason Weston’s stock has remained flat. They have historically had too little debt, too much cash, and aren’t doing anything with either.
Loblaw is a family business, and its numbers look pretty much like ours. No debt, extremely top heavy, and a business model that is based mainly on the sales of some manifestation of societal virtue. When Wal-Mart moved to town, for some reason Loblaw thought they had to compete with them. They famously closed 19 stores in efforts to battle 3 as-yet-unopened Wal-Mart stores in Ontario. Loblaw was shackled with long-term contracts and unions and couldn’t keep up with Wal-Mart’s new-economy financial complexity. They marketed niches and protectionism, lobbied with the unions, and acquired other stodgy companies. While they had countless pyhrric victories, there was no way they were going to win the war against the IT-heavy, operationally and financially efficient, non-unionized, cheaper, faster Wal-Mart. They increased their LTD load to mimic Wal-Mart, closed a lot of stores, acquired others, fired administrators, hired some Wal-Mart executives and started offering non-food items.
Loblaw’s historical success has been slow-growth with spikes of acquisitions. As we mentioned in the article, they have simultaneously held an increasing amount of money back for acquisitions while running out of acquisition candidates. That brings me to my first recommendation: do something with your money. Investors hate to see stagnant money, and popping it all into the stock market would generate more revenue and placate more critics than allowing it to sit in a short term Cash account. More realistically, pick a competitor to acquire, buy a vendor, buy more supply chain, buy your way out of the union, go dark—something that drives you toward your goal.
Which brings us to the even more fundamental question: what are your goals? Loblaw wants to be biggest and best grocery store, which it is. Why then is it so afraid of Wal-Mart? They state in many press releases that Canadians are much more focused on quality, especially when it comes to food, than citizens of the US. Why kill your golden goose to go head-to-head with a low-quality low-price competitor? Why sell non-food items? Why get into a price-war if one can be avoided? Is it greed or tunnel vision on the part of the owners?
Loblaw was correct in increasing its debt, but increased debt must correspond to increased cashflow. If the debt isn’t working for you, what’s the point? Loblaw worked hard to decrease their debt over the last 15 years (1.9-1.2), then at the threat of Wal-Mart increased it back to an industry-average range (1.4). This is apparently where the market wants them to be, but there is a second half to that request, and that is to do something with the money. I’m not saying blow the money; I am saying not to take it until you have something to spend it on, and if you think there’s nothing to spend it on then your executives aren’t leading. To paraphrase Covey, the sole job of a leader is to decide which tree to cut down (leaving any and all cutting to the managers.) So spend your debt, find charismatic leaders to counterbalance your managerial culture…
No responses yet