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I keep coming up against a logical fallacy in strategy that I feel compelled to address. The logic holds that when a company has a shareholder-unfriendly component of its portfolio e.g. the business in question is cyclical, or it is low-growth or low margin the company should diversify to make that business less-shareholder unfriendly. I take on the fallacy in this Playing to Win/Practitioner Insights (PTW/PI) piece entitled Diversification Cant Disappear a Strategy Problem: It Just Creates a Different Problem. And as always, you can find all the previous PTW/PI here. The argument The usual motivator of this argument is cyclicality: We have a cyclical business, and shareholders dont like the ups and downs of that business across the cycle, so they discount our stock because of the volatility of our earnings. A memorable example of this for me was Alcan in the 1980s, at that time the worlds best aluminum company and arguably Canadas finest company. But it didnt like the cyclicality of its core business, which was making and selling aluminum ingots. The downstream industries that used aluminum in some way appeared alluringly less cyclical. So, Alcan invested in a number of those businesses including packaging and aluminum structured automobiles. Other shareholder-unfriendly attributes include being a slow-growth business. This causes companies like News Corporation to buy MySpace to get into a fast-growing business Internet services. Another is a business that has experienced a drop in structural attractiveness and hence inherent profitability level, perhaps because buyers are getting more powerful or a supplied input becomes much more expensive. Unfortunately, these diversification efforts dont often succeed. For Alcan, these downstream businesses turned out to have very little in common with the skills and capabilities involved in making ingots of aluminum and were eventually sold off. For example, the packaging portfolio was sold off to Amcor, a global packaging company that knew how to run a packaging business. And News Corporation exited MySpace with its tail between its legs, selling it for $35 million six years after buying it for $580 million I am not opposed to the intent I am in favor of improving ones portfolio of businesses. In fact, I was part of one of the greatest such efforts in recent memory. I was on the board of Thomson Corporation, which started its transformation as the worlds largest newspaper company, the worlds largest textbook publisher (tied with Pearson), Europes largest travel company, and a major player in North Sea oil. It concluded the transformation as Thomson Reuters, the leading supplier of on-line, subscription-based must-have information, analytics, and workflow solutions for legal, financial, accounting, and investor relations professionals having exited its entire starting portfolio. So, I get it. I like investing in good businesses as much as the next person. I just hate the logic regarding shareholders Shareholders arent geniuses I have said that on numerous occasions (e.g. here and here). But they are not stupid either. Lets say the company is correct that shareholders dont like something about an important business in its portfolio it is cyclical or growing slowly or its industry is becoming less structurally attractive. If that is true, shareholders will collectively price that negative feature into their valuation of that business as part of their overall valuation of the stock. Lets say the contribution of that shareholder-unfriendly business to corporate earnings per share (EPS) is $4/share and that if it wasnt cyclical, shareholders would put a 20X multiple on those earnings. So, it would have contributed $80 towards the companys overall share price. But lets say that because it is cyclical, shareholders discount the value of those earning to a 15X multiple, meaning that the cyclicality of the business costs the company $20 on its share price (i.e., $4 of EPS X 5 times lower multiple). And if there are 50 million shares outstanding, that is a cost of $1 billion in shareholder value due to the cyclicality of that business. The same calculation would hold if it were a slower growing business on which the shareholders similarly put a 15X multiple instead of 20X. Or if a business has experienced a sharp structural drop in future profit potential. The bottom line is that because of the features of the existing business, shareholders subtract $1 billion of value from the overall valuation of the business. Lets continue with the logic. Imagine the company diversifies into a non-cyclical business or fast-growing business or higher profit business. If it is a great business, the shareholders will put a high valuation on it. Lets say that the company buys such a business for $2 billion and it performs so well that shareholders soon value it at $5 billion which makes it a great diversification investment. But the logic of this argument holds further (implicitly) that over and above the value that shareholders will give to the great new business into which the company diversified, the shareholders will reduce the $1 billion valuation hit that they are applying to the problematic business. Not only can I not think of any reason why shareholders would do that, I have never seen them do it because there is no reason. In the words of the great Nobel Laureate, the late George Stigler, when I met him in his Chicago apartment, Roger, a company cant use its competitive advantage twice brilliant insight from a brilliant man. In this case, it cant use the plus-$5 billion to disappear the minus-$1 billion. In essence, it will be a plus $5 billion and an unchanged minus $1 billion. What is the problem? As I said, I like investing in great new businesses. If there is a $5 billion opportunity available for a $2 billion price, a company is foolish not to grab it. The problem is a company putting itself in the position of believing the presence of the undesirable business creates a requirement to diversify. This is especially the case because the tool used is typically acquisition because organic growth is viewed as taking too long to solve the problem. And the failure rate in acquisitions is legendarily high in the general case. This is a very specific case that makes doing a successful acquisition even harder. There is a very specific requirement of the acquisition it must reduce our overall cyclicality, or increase our overall growth rate, or increase our overall profit margin. These are hard criteria to meet in an exercise that already has a high degree of difficulty. Additionally, it works against a key principle that helps determine acquisition success. As Ihave written about previously in Harvard Business Review, acquisitions are more financially and strategically successful if they are more about what the acquiring company can do to help the acquired company than the other way around. When the focus is on what the acquired company can do for the acquirer, the acquirer tends to have to pay top dollar for the acquired company and the acquirer can do little to help pay for the high takeover premium, as with the News Corporation-MySpace acquisition above. News Corporation paid absolutely top dollar and it had no idea how to help MySpace as it faced withering competition. Thus, in the failure-ridden world of acquisitions, the logic of this diversify-to-eliminate-the-shareholder-problem drives companies toward very low success rate approaches. Net, there are compounding shortcomings of the approach. First, it doesnt actually solve the problem for which it is designed to solve. And second, it involves engaging in a very high-risk activity. That is not a good combination. Implications for strategy As I pointed out previously in yet another Harvard Business Review article, companies are better off if they simply value businesses at what they are worth not their value on the books. They may wish that a business was worth as much as or more than the amount of investment put into it. But the instant the investment is irreversibly made into the business in question, its value becomes a function of its future prospects, not its book value. If it was a poor investment, its true value will go down, and the opposite if it was a good investment. That is the valuation that shareholders make every trading minute. They revalue your assets continuously by collectively buying and selling your shares. Why shouldnt you revalue similarly? Bad businesses dont have bad shareholder returns shareholders have long since revalued them downwards. And great businesses dont automatically have great shareholder returns shareholders have long since revalued them upwards. Shareholders get valuation. If you can make a business better great, just do it. But dont try to disguise the shortcomings of a business through diversification. You arent fooling anyone but yourself and certainly not the shareholders. A far better plan is to suck it up and recognize the true value. And if you dont like what you have, sell it and move on. That is what we did at Thomson Reuters. We didnt attempt to disguise the negative attributes of portfolio companies. We got rid of them to companies that liked their attributes better than we did. For example, we sold our newspaper business to the worlds biggest newspaper company, Gannett, for US$2.2 billion. They were enthusiastic but it ended up being a deal that a Gannett CFO later confessed to me was the worst acquisition deal in his companys history. And even better, we sold the textbook business to a pair of delusional private equity firms for US$7.75 billion, and they resold it three years later for a reported US$2.25 billion ouch! The combined divestiture proceeds of US$10 billion were really helpful in bringing the transformation to fruition. Practitioner insights I try hard not to be disrespectful to the status quo. Most things that stick around for a long time do so because they have shown themselves to make sense. But in the world of business ideas, a minority like SWOT, strategies not strategy, and revenue forecasting stick around even if they fail to make any logical sense. You must be ready to reject them when they are demonstrably dumb ideas. This is one of them. Dont invest in big and high-risk ways to disguise a problem that cant be disguised. It is one of the silliest and most wasteful activities in company life. And there are lots of folks hanging around that make huge returns by whispering in corporate executive ears about this kind of diversification. They are the (so-called) strategy consultants, investment bankers, and M&A lawyers who make countless billions promoting stupid deals, like the disastrous AT&T takeover of Time Warner which AT&T bought for $85 billion and sold for $43 billion three years later. That was the equivalent of the AT&T executive team making a $38 million stack of shareholder money outside AT&T corporate headquarters, pouring gasoline on it and lighting it on fire and repeating that exercise every day for three years. The brilliant deal was purportedly going to get the boring AT&T into the exciting, faster growing and higher margin content business. I predicted at the time that it would be an epic disaster and it most certainly was. It is what happens when you adhere to a loser theory. Instead, either love a business or get rid of it to someone who will love it more. You cant win in a business that you dont love. Competitors who love their business will wipe the floor with you and yours. Only spend time and resources on businesses that you love. Those are the only ones that will get the care, attention and investment that they need and deserve.
Category:
E-Commerce
You might think of Walmart as Americas quintessential big box storethe place you can get everything from Hanes T-shirts to large screen TVs to cleats for your kid’s soccer uniform. But Walmart isn’t defying shaky consumer confidence because of the breadth of its offerings, which impressively stretches to 120,000 products at most stores. Customers aren’t flocking into stores to buy made-in-America T-shirts, as I wrote about in May, thanks to a novel partnership with American Giant. Or because it is adding more high-end products (at lower prices than you’d find anywhere else), as I covered in October in this profile of its chief merchant Latriece Watkins. Nor is this about breakthrough new products exclusive to Walmart such as Glen Powell’s Smash Kitchen line of condiments, which hit $10 million in revenue in just six months. (I wrote about how Powell and his cofounders pulled off that feat, revealing their growth numbers for the first time, and how products like theirs fit within Walmart’s overall strategy.) You’re getting warmer, though. If you want to understand why Walmart is beating the odds, this where you should look: the grocery aisles. Walmart has gone from a general merchandise store that also sells groceries to America’s grocery store that also happens to sell everything else you could imagine. The Arkansas-based retailer, which generated $648.1 billion in revenue last year (60% of which came from food), accounts for more than a fifth of all grocery dollars in the country. Since 2019, Walmart has been in the top position when it comes to grocery market share, with Kroger coming in at a distant second at less than 10%. Walmart’s grocery business has been key to its financial success at a time when many other retailers are struggling. Last week, Walmart posted strong quarterly results, with U.S. sales increasing by 4.5%. It has seen an increase in spending per visit, and gains among families with household incomes higher than $100,000 and $200,000. As a result, Walmart has raised its sales and profit guidance, suggesting that it expects to have a stellar holiday shopping season. In contrast, Target posted a drop in sales, and lowered its full-year profit guidance. Grocery store as Trojan horse Walmart’s grocery business has been a Trojan horse. Customers come to the store to stock up their fridge and pantry on low-priced food items, then pick up socks and video games while they’re at it. From the time of Walmart’s founding in 1962, the company’s strategy has been to leverage its enormous buying power to compel brands to sell their products at very low prices. “For most suppliers, Walmart is their biggest customer,” Rachel Slade, author of Making it in America, told me earlier this year. “It’s almost impossible for them to say no to Walmart’s terms.” Walmart’s prices are generally between 10% and 25% lower than competitors. As a result, it has put many smaller retailers and mom-and-moms shops out of business. This, in turn, increases it market share. Today, its 4,605 stores are within 10 miles of 90% of the population. But over the past five years, as the economy has gotten more volatile and inflation has spiked, Walmart’s low grocery prices have begun to appeal to higher income Americans, who feel the need to tighten their belts. The company is doing this in several clever ways. Last year, it launched Bettergoods, its first new in-house food brand in two decades, that is is perfectly calibrated to the tastes of the higher-income consumer. It has all the markers of a premium brand, with sleek, vibrant branding, but it is also designed to appeal to food preferences of wealthier consumers, including from organic milk to plant-based mozzarella to single origin coffee. Sucharita Kodali, a retail analyst at Forrester, says that she’s been impressed with the quality of food in her local Walmart’s grocery section in New Jersey. Products are neatly organized and fresh produce is high quality and inviting. “The quality is just as good as Whole Foods,” says Kodali. This has come in stark contrast to Target, where groceries make up 23% of the products in store. Over the few years, consumers have complained about Target’s grocery and bakery sections being out of stock, messy shelves, and misplaced inventory. Kodali says she’s seen expired food on Target shelves, which is “the worst thing you can do as a retailer.” E-comm as an entry The challenge for Walmart is that many of its higher-income consumers aren’t used to visiting Walmart’s stores, and might be bashful about shopping at what is perceived as a budget retailer. But for more than a decade, Walmart has been beefing up its e-commerce capabilities. When it comes to groceries, it is now significantly ahead of its biggest competitors, capturing 31.6% of grocery e-commerce sales in 2025, ahead of Amazon (22.6%) and Kroger (8.6%). Customers can order groceries online and get them as fast as two hours. And Walmart has a subscription program called Walmart+ that offers free deliver with no order minimum, and is designed to compete directly with Amazon Prime. But just as with low-income consumers, Walmart wants to encourage these higher income shoppers to buy more than food. As I reported in the latest issue of the magazine, Walmart’s chief merchant, Latriece Watkins, has been on a mission to bring in more premium brands into the store, like Sonos speakers, DeLonghi coffee makers, and LaRoche-Posay skincare. The strategy appears to be working. The latest financial report shows that the average amount consumers are spending per transaction has gone up by 2% from a year ago. Can Walmart keep this growth streak up? That’s an open question. During the Great Recession of 2008, affluent consumers flocked to Walmart in an effort to stretch their dollars. But when financial pressures eased, the Walmart acknowledges that many of these newfound customers eventually went back to competitors. This time, however, Walmart appears to have a longer-term strategy to keep wealthier consumers coming back, from creating products that cater to their tastes to keeping them locked in with the Walmart+ subscription program. We’ll have to see if these shoppers stick around when the economy gets better.
Category:
E-Commerce
A copy of the first Superman issue, unearthed by three brothers cleaning out their late mother’s attic, netted $9.12 million this month at a Texas auction house which says it is the most expensive comic book ever sold.The brothers discovered the comic book in a cardboard box beneath layers of brittle newspapers, dust and cobwebs in their deceased mother’s San Francisco home last year, alongside a handful of other rare comics that she and her sibling had collected on the cusp of World War II.She had told her children she had a valuable comic book collection hidden away, but they had never seen it until they put her house up for sale and decided to comb through her belongings for heirlooms, said Lon Allen, vice president of comics at Heritage Auctions. The brothers uncovered the box of comics and sent a message to the auction company, leading Allen to fly out to San Francisco earlier this year to inspect their copy of “Superman No. 1” and show it to other experts for appraisal.“It was just in an attic, sitting in a box, could have easily been thrown away, could’ve easily been destroyed in a thousand different ways,” Allen said. “A lot of people got excited because it’s just every factor in collecting that you could possibly want all rolled into one.”The “Superman No. 1” comic, released in 1939 by Detective Comics Inc., is one of a small number of copies known to be in existence and is in excellent condition. The Man of Steel was the first superhero to enter pop culture, helping boost the copy’s value among collectors, alongside its improbable backstory, Allen said.The previous record for the world’s most expensive comic book had been set last year, when an “Action Comics No. 1” which first introduced Superman to the world as part of an anthology sold for $6 million. In 2022, another Superman No. 1 sold for $5.3 million.A small, in-house advertisement in the comic book helped experts identify it as originating from the first edition of 500,000 Superman No. 1 copies ever printed. Allen estimates there are fewer than 500 in existence today.The copy was not given any special protection, but the cool Northern California climate helped preserve it, leaving it with a firm spine, vibrant colors and crisp corners, according to a statement from Dallas-based Heritage Auctions. The copy was rated a 9.0 out of 10 by comics grading company CGC, meaning it had only the slightest signs of wear and aging.The three brothers, in their 50s and 60s, did not wish to be identified due to the windfall involved nor did the buyer of the comic book, according to the auction house.“This isn’t simply a story about old paper and ink,” one brother said in a statement released by the auction house. “This was never just about a collectible. This is a testament to memory, family and the unexpected ways the past finds its way back to us.” Brook is a corps member for The Associated Press/Report for America Statehouse News Initiative. Report for America is a nonprofit national service program that places journalists in local newsrooms to report on undercovered issues. Jack Brook, Associated Press/Report for America
Category:
E-Commerce
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