Stores 2008 Global Powers of Retailing - (Page 38) 2008 global powers of retailing if a company’s Q ratio is less than one, theoretically a company could be purchased through equity markets and the tangible assets could then be sold at a profit. Among the interesting results of the analysis are the following: • Size doesn’t seem to matter. The composite Q ratio for the top 50 companies ranked by revenue is roughly the same as that of the bottom 50 companies ranked by revenue. The composite Q ratio for the top 50 companies ranked by market capitalization is considerably higher than the composite for the bottom 50. In other words, companies that have achieved a high market value are more likely to have high Q ratios than those that have small market values. Composite Q ratio differs by country. Companies based in China, Australia, and South Africa have high Q ratios. Companies in Western Europe and Japan have, on average, relatively low Q ratios. Companies based in emerging markets have relatively high Q ratios. This result is similar to findings in previous editions of this report. Q ratios were also analyzed based on dominant formats. Not surprisingly, companies focused on the specialty apparel format have the highest Q ratios. This is consistent with past experience and demonstrates the brand-intensive nature of such businesses. High ratios are also found for drug, cash & carry, and supermarket retailers. The latter, at 1.771, is a bit surprising and not similar to past results. It is skewed to some degree by the extraordinary market value of Publix Supermarkets, Inc. Excluding that company, the composite Q ratio for supermarkets is a more modest 1.197. Low Q ratios were found for convenience, department store, and diversified retailers. The latter are companies for which there is no dominant format. As in the past, such retailers do not perform well on this list. Companies were also analyzed based on dominant merchandise category. In other words, a company involved in several formats, each focused on food, drug, and mass market products would be categorized as a food, drug, and mass market retailer. The four categories in this report are fast moving consumer goods (FMCG); softgoods; hardgoods; and diversified. Not surprisingly, softgoods retailers have the highest composite Q ratio. Diversifed retailers (those with no dominant merchandise category) have the lowest. Why is the Q ratio useful? One of the biggest challenges facing any retailer today is commoditization. That is, consumers are increasingly viewing retailers as undifferentiated from one another except on the basis of price. This attitude causes intense price competition and tends to drive down margins. Only the lowest cost leaders in any retail segment can compete primarily on the basis of price — all others must do something else. The antidote to commoditization, therefore, is differentiation through better customer experience and innovation. Such differentiation must also be well communicated to consumers through strong branding. Consequently, a high Q ratio indicates that the financial markets believe a retailer is doing the right things to succeed in the current business environment. A Q ratio below one may indicate that the financial markets believe a retailer is failing to use its physical assets in a profitable manner. One caveat, however. Some retailers are more asset intensive than others. Some lease stores rather than own stores. This fact can distort a Q ratio. Therefore, the Q ratio should be taken with a grain of salt. • • • What do the numbers say? The Q ratio was calculated for the publicly traded companies that appear on the list of the world’s top 250 retailers. Some public companies were excluded where the market value has been highly influenced by the existence of strong non-retail businesses. The result is an analysis of 146 retail companies based on asset data from the most recent financial statements and on market capitalization (share price times number of shares) as of November 2007. The average Q ratio for all 146 companies is 1.332. The composite Q ratio (the sum of all company’s market capitalizations divided by the sum of all company’s assets) is 1.571. The company with the highest Q ratio is Publix Supermarkets, Inc. at 12.637. This US-based supermarket chain has seen its share price increase dramatically in the past two years. The other top companies are H&M Hennes & Mauritz AB, the Sweden-based specialty apparel chain at 11.422, Suning Appliance Co. Ltd at 10.916, a China-based electronics retailer who’s share price has increased dramatically, Amazon.com Inc, the US-based online retailer at 8.029, and Inditex S.A. the Spain-based specialty apparel retailer at 6.160. • G38 STORES / January 2008 www.deloitte.com/consumerbusiness http://Amazon.com http://www.deloitte.com/consumerbusiness
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