Intangible assets make up value, in Retail too
By Frederic Pariente-Oracle on Mar 30, 2009
With the interview of Pr. Simon Parienté on page 6 in this month's (March 2009) issue of Linéaires, a leading French magazine targeted at grocery retail professionals, about his (corporate finance) work in the Retail industry, I would like to acknowledge an interesting study I had the opportunity to participate in and come back on some of its findings. The study (#200806), published last October, is sponsored by ILEC, a French association representing the largest branded food, beverage and consumer-product manufacturers. It seeks to do a comparative analysis of the financial performance of retail stores and consumer-product manufacturers.
Here is an excerpt of the results.
- Overall, retailers outperform manufacturers, on an individual basis --results differ when analyzing aggregate accounts because a few large manufacturers account then for most of the figures. The single most discriminating factor is the cost of trade financing. Through large Accounts Payable constituting low-cost liabilities, retailers need less equity as part of the capital employed and are able to offer an higher ROE (+5 pts).
- Large (branded) manufacturers are much more profitable than SMB. In fact, the small and medium manufacturers destroy value --in the sense of economic value creation (EVA), that is based on ROCE and not a simple profit margin ratio-- while the large manufacturers and the retail stores create value.
- For both retailers and manufacturers, margins yield a better profitability (+8 pts on ROCE) and more value creation (x5 impact of an incremental pt) than volumes --captured by the assets turnover ratio. To be more precise, it is less the level of margin --margins are typically low in grocery retail-- but the delta margin beyond the industry average, i.e. the ability of a company to improve its margins --through higher price or lower cost--, that matters.
The quest for margins have thus led manufacturers and retailers to invest in product innovation, branding and advertizing. For retailers, product innovation may have translated into store-branded products; see them not as a way to sell at a premium to the consumer --generic products were the initial targets-- but to increase pressure on the supplier --putting all suppliers in a fierce competition on price, both the product and packaging being specified. Similar to the high-tech industry then, product differentiation through branding and innovation --constituting the intangible assets of the company-- is at the heart of the company's bargaining power and margins, resulting in higher returns and value for shareholders.
It will sound like an odd transition but this study makes me bullish about Sun. At the center of things, as I understand it, it is less the ability to sell than to the ability to secure margins that makes a company successful in the long run, i.e. to create value. Sun has a long list of awesome technologies and franchises (Java, Lustre, MySQL, OpenOffice, Solaris) and keeps adding more (JavaFX, OpenSparc, OpenStorage, Sun Cloud, xVM). They constitute the necessary foundations on which Sun is building value as we increasingly become better at monetizing these assets. Did you know SAP contracted Java SE for Business support from Sun? Have you read about HP OEM'ing Solaris 10 from Sun? Did you know Lustre powers 50% of the Top 50 supercomputers?