eBay tops value creation league table
Auction site success highlighted in new research
March 10 2003
Internet retailer eBay can claim to be the world’s most successful retailer according to league tables produced by the Retail Value Creation research project.
UK retailers including Matalan, Carpetright and Ted Baker all feature in the top ten, with DFS Furniture just outside in eleventh place.
US-based Internet auction retailer eBay was significantly ahead of its nearest rivals in the tables compiled by Oxford University’s Templeton College and sponsored by KPMG International.
Along with the three UK firms, other top ten retailers include Sweden’s Hennes & Mauritz, Germany’s rising star, Beate Uhse and Bed, Bath & Beyond from the US.
The study analyses the published financial results of the world’s top 500 quoted retailers to rank them by two different mathematical calculations – their Value Creation Quotient (VCQ) and their Realised Economic Value (REV).
The VCQ measures the return generated on every dollar of capital investment – anything above one represents value creation, below one represents value destruction. The REV rating is a risk-adjusted measure of cash flow, effectively judging a company’s ability to generate cash.
Dmitry Dragun, a senior researcher at Templeton and author of the study, said: “eBay is the uncontested champion of retailers in terms of value creation. Its VCQ of 12.2 has catapulted it from ninth last year to top spot this time round while its REV rating has improved from 335th out of 500 up to 152nd. The combination of these figures show that the company’s strategic and operational policies are paying off. At the same time, eBay has single-handedly kept the average performance of the Internet retailing sector artificially high.
“Last year’s league leader, Matalan. has dropped to third with a VCQ of 8.6, mainly due to a severe stockmarket de-rating arising from concerns about increasing competition and eroding margins. Slightly further down the table at seventh, HK Pharmaceutical’s results are noteworthy as there is a massive discrepancy between their highly respectable VCQ and low REV rating. This is because their high valuation rests on expectations of successful growth and product development in the Chinese drug market.”
The overall picture for the retail sector is a mixed one. Nearly a third of the 500 retailers had a VCQ of less than one – clearly indicating the market’s lack of faith in them. However, 67 retailers had high valuations, meaning that the value creation potential for global retailing is far from extinguished.
Amanda Aldridge, Head of Retail at KPMG commented: “Although the figures for the whole sector declined in comparison to last year, they declined by less than the world’s 1000 biggest companies in the benchmark MSCI World Index. The relative resilience which all the retail sectors – with the exception of e-tailing – have demonstrated in the face of difficult economic conditions attests to the strong defensive reputation of retailing.
“Looking at the retailers by geography, North America is easily in the strongest position, with the highest average returns on REV and VCQ of all the regions. This excellent position means that they are ideally placed to make first use of any economic recovery which may transpire. The position of the Asian retailers eroded over the year, mainly due to performance problems in Hong Kong and South Korea. However, they are still better placed than Japanese retailers where adequate shareholder returns are unlikely due to huge over-capacity, little pricing power, flagging consumer demand and a deflationary environment.”
Amongst the largest players within the retail sector, 16 kept their places within the top 20, despite only six sustaining or improving their risk-adjusted cash profitability. Dragun said: “Despite stumbling in terms of cash generation, the largest retailers have broadly maintained their relative value position, thanks to the market openly favouring their huge cash flows. The real value champions though are businesses like Matalan, H&M and Carpetright – typically small to medium sized, non-acquisitive businesses. They are strategically decisive, focus on their home markets and have exceptional cash-generating abilities.”
Aldridge added: “The old tenet of cash is king remains with retailers being recognised and rewarded by the market on the basis of cash generation ability. However, size does count and, despite some of the smaller companies being amongst the best at generating cash, their share prices are often discounted, in part because of the relatively low volume of their cash flow.”
Top 25 Retailers by Value Creation
1 EBay (USA)
2 Hennes & Mauritz (Sweden)
3 Matalan (UK)
4 Bed Bath & Beyond (USA)
5 Carpetright (UK)
6 Beate Uhse (Germany)
7 HK Pharmaceutical (Hong Kong)
8 Ted Baker (UK)
9 Fast Retailing (Japan)
10 Woolworths (Australia)
11 DFS Furniture (UK)
12 99 Cents Only Stores (USA)
13 Walgreen (USA)
14 CDW Computer Centers (USA)
15 Duty Free Shops (Greece)
16 A-B Vassilopoulos (Greece)
17 Christopher & Banks (USA)
18 Home Depot (USA)
19 Kohl’s (USA)
20 Seven-Eleven (Japan)
21 Next (UK)
22 Miller’s Retail (Australia)
23 Hamleys (UK)
24 Family Dollar Stores (USA)
25 Hot Topic (USA)
