The Economist Corner: Comments on Private Equity, The Markets and Specialty Grocers.
This is one of those weeks when The Economist and its hybrid reporting/policy suggesting approach is overflowing with meaty articles.
Besides an in-depth dig at Putin’s Russia, The Economist does both an opinion piece and longer article examining the power the private equity industry has come to wield.
For instance Carlyle, through all the companies they own, is the second largest employer in the country-after Walmart-with 725,000 employees-while several other private equity companies are also near the top in this regard.
The Economist laments the fact that the ultra-wealthy are choosing private equity instruments for investing instead of the stock market which has seen listed companies shrink from 7,000 in the late 90’s to 4,000 today. IPOS this year are estimated to be 50-75% less than 10 years ago.
As the magazine says, “Public companies are out of fashion. They need to be revived.” To tell you the truth as a retail investor in the market this article made me feel like a “chump,” to use the old fashioned term.
On one hand The Economist says something must be done to get the cash back into the markets. “Public Markets are inclusive and deep; they should provide capital efficiently (meaning inexpensively and intelligently) and should as a result be the best solution for both companies and investors. They should thus outperform the competition.”…..
But then The Economist goes into so much detail about how the private equity firms work-how focused they are compared to the public companies- and how that focus drives the much higher returns the private equity industry sees compared to Wall Street you begin to wonder why anyone with large sums to invest would do it with Wall Street.
Let’s see…. if it’s a decision between banking on all the “shoulds” The Economist feels –should… be happening- or taking the profits that the focus and higher returns private equity is delivering right now……is there really going to be much of a decision process in making a choice?
After you weigh the various challenges publicly traded companies face-like more public and government scrutiny, “quarterly capitalism” or the activist investors, and all the red tape involved in being public it’s not hard to understand given the polarized nature of today’s society-why more and more investors and companies are shying away from public offerings. Politicians during this cycle have routinely signaled out Wall Street for beating up.
Plus start-ups, because of their technological basis need less money to get off the ground-companies like Uber have even invented industries and have done so quickly without the need for the kinds of funds on the scale Wall Street is traditionally used for.
In addition private equity, unlike public companies- can take advantage of tax laws which allow them to load up on debt and in doing do so reduce the taxable income they’re subject to. Both Clinton and Trump have said they want to address this private equity industry advantage.
This article appeared just as the Whole Foods problem with hepatitis A was announced in Detroit last week. And this followed a Supermarket News interview with a Wall Street analyst who specializes in grocery in which he expressed his skepticism about Whole Food’s ability to recapture the reputation and profits it once enjoyed. Yes margins are still good but as many have been pointing out there’s a lot more competition from others carrying organic and natural foods-and at lower prices which is not only affecting same store comps but causing Whole Foods to be reactive rather than lead the pack.
The analyst’s thoughts aside I found myself wondering whether going public was really the best thing for Whole Foods and other formerly private companies like The Fresh Market and Wild Oats in its day. Having worked with these companies over the years in their pre and post private days, I’ve come to believe that these companies compromised their focus-the very element now driving the success private equity companies are experiencing.
Ask yourself what does Whole Foods stand for these days? The “whole paycheck” meme, rather than the high quality experience which made them the benchmark for upscale/specialty retailers, is more often associated with them these days-a product of the increased scrutiny that came with being a public company.
Is chasing lower demographics with the lower priced and serviced stores in Detroit, Chicago and New Orleans in addition to 365 which are designed to deliver a lower priced experience-while reducing the elements that helped build their reputation in the first place- really playing to the strengths that made them such a powerhouse?
The Fresh Market was never the same after it went public- while delivering a nice payload to the founders in the process. Is their new, 1 stop shopping reformulation really going to work now that they’re competing directly with so many others with years of experience in this regard?
Wild Oats seemed to change overnight bringing in big guns from mainstream grocers to run their operation and in the process turning off many of the venders who had been serving them loyally for years as suddenly there were demands for slotting fees and a host of other requests mimicking what public companies elsewhere do-which in hindsight seemed like approaches designed to prepare the company for a sale rather than improve it.
One has to wonder whether going public is always in the best interests of grocers with their own unique identity and culture. Look at Trader Joes, Aldi, Lidl, H.E.B in TX-all privately held companies showing no signs of being off message. Without the challenges plaguing publicly-held companies they’re free to go about doing what they do-and doing it profitably without the short-term mentality investors from the Markets bring.
If you’re Elon Musk you have the type of personality that can take a more free-form approach to running public companies and deal with the heat from investors and financial experts without seeming to compromise their mission-but he’s the exception.
In the end it seems to me that it’s the specific focus-the company’s mission and culture-that the decision on whether to stay private or go public should be evaluated against.
Private equity seems to be a good match for New Seasons, Metropolitan Market and Bristol Farms-the Endeavour held companies-which continue to be on point with their traditional focus.
Haggen’s melt down appears to be an anomaly in the private equity area. You could see it was going to be a disaster early on. But in this case it’s likely their owners-a private equity firm out of Florida still made money on the deal as no doubt they did what many other private firms do-load on the debit from the acquisition and use it to lower their taxable income.
But when it comes to upscale/specialty grocers the most important consideration-like the private equity industry- may be focus.
This more niche-orientated approach is fundamental to the success of private equity and it may be the most important aspect for an upscale/specialty grocer to look at when it considers going public. Will they compromise their focus going public?
As The Economist admits, it may be quite a while before the challenges arising from the nature of being a public company can be mollified. Until then they admit, it looks like private equity may remain the best choice for wealthy investors. And it may still be the best option for specialty/upscale grocers who find themselves wanting to raise money without sacrificing their mission focus, their unique identity, in the process.