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Was Tesco’s Real Estate Decision
A Result OF Hubris Or Humility?

One of the issues that keeps coming up in our discussion of Tesco’s new operation in America is real estate.

It is fair to say that retail and real estate always intersect.

We previously pointed out that Tesco was going to have a problem and wind up with a lot of sub-standard real estate simply because it is impossible to roll out stores on Tesco’s schedule, yet do it only with great sites. In fact, we contrasted the way Tesco was working with Kroger’s approach.

We also ran a piece entitled, A Closer Look At Tesco’s Finances, which pointed out that substantial holdings of real estate can distort earnings:

Warren Buffett, the world-renowned investor, through Berkshire Hathaway, the company of which he is CEO, has acquired a significant stake in Tesco, which has been interpreted as Buffett’s endorsement of Tesco’s chances of taking on Wal-Mart in America. The Pundit wonders if a better interpretation is that this famous value investor has noted Tesco’s substantial real estate holdings and decided that this value will eventually be unlocked.

Tesco owns a great deal of real estate and the City, London’s version of Wall Street, has been pressing Tesco to sell it. Tesco’s management has generally resisted such pleas, and when it has sold real estate, Tesco has tried to do it with complicated joint ventures through which it is impossible to know if Tesco actually got the maximum price for the property, as Tesco continues to lease the space on a basis negotiated before the sale.

Tesco CEO Terry Leahy was reported by Reuters as explaining his position this way:

“Tesco has a lot of property, but it is important to remember property ownership is an integral part of retailing and Tesco will always have a majority of its space as owned space.”

Actually, owning real estate is an excellent way for retailers to report earnings that appear sterling but are actually not providing an adequate return on deployed capital.

In retailing the relevant capital being deployed is not what a building cost 30 years ago or its depreciated basis; it is what the building could be sold for today.

As part of its annual report, Tesco announced that after some large joint ventures that transferred over 10 billion pounds sterling of property to ventures with the British Airways Pension Fund and The British Land Company PLC, Tesco still has real estate, mostly individual stores, worth 28 billion pounds sterling.

Here is the rub: The entire profit of the Tesco organization was just reported, before tax, at 2,653,000,000 pounds sterling. All else being equal, this means that if Tesco sold all the real estate and the new owners leased it back to Tesco on a net, net, net basis (meaning Tesco still had to pay the real estate taxes, insurance, maintenance, etc.) and demanded a 10% return on their investment, Tesco would lose money.

If the investors were content to make a 5% return on their money, Tesco would see its profits plummet by more than 50%. And all this assumes that Tesco’s report on the value of its property is accurate. Possibly, a true liquidation, without regard to lease terms for Tesco, would realize even higher values.

However one figures it, the mighty Tesco has an operating business that crucially depends on billions of dollars in real estate deployed at sub-par returns.

Yet in the United States Tesco doesn’t have this legacy of real estate investments and so will have to lease property at market value.

Which means, even if its U.S. operation is equally as successful as its British parent, it will be significantly less profitable than the British operation.

The other day, in our piece, Tesco Observations From a Retail Pro, we published this point:

As you would expect, in order to make a real estate impact Tesco took every dark site available. Many of these sites are dark because someone else could not operate them profitably.

Hubris, or as the Greeks wrote it, ὕβρις, is typically translated today as an exaggerated pride or self-confidence. We think of it, typically, in the context of “Hubris against the Gods,” which is the character flaw of the heroes in Greek tragedy.

These heroes commit an “act of hubris” known as Ate — in Greek ατή — which is commonly translated as “ruin, folly, delusion.”

This action is the cause of the “nemesis” — in Greek Νέμεσις — translated as destruction or downfall.

From this we get our modern sense of the word as overconfidence and arrogance often drawing on an ignorance of history and a complete lack of humility.

The question is really whether Tesco, in looking at these dark stores where others failed, approached the situation with humility or arrogance.

It is the easiest thing in business to assume that others failed because they weren’t any good — they didn’t merchandise well, they didn’t build the right distribution center, they didn’t position themselves properly — and then plunge in, assuming you know how to do it better.

Every once in awhile it is true — but, mostly, it is false. Mostly it is a hubristic attitude. The most reasonable approach is to assume that competitors draw on similar talent pools, have a similar cost of capital, etc., and, most crucially, that they are good at what they do. In this case, that American firms operating those very sites knew what they were doing.

Then one looks at that empty store front with humility and moves cautiously.

To some extent, the fate of the whole Fresh & Easy venture may depend on whether Tesco acted with hubris or humility in evaluating these sites.

For Tesco’s sake, we hope it is the latter. For if it is the former — if it was an act of delusion, of Ate, to lease these sites — then we can expect its American competitors to act robustly. They may remember the scene in Shakespeare’s Julius Caesar in which the Goddess known as Ate appears, a symbol of vengeance. Mark Antony, speaking of Caesar’s murder predicts:

“And Caesar’s spirit, ranging for revenge,
With Ate’ by his side come hot from Hell,
Shall in these confines with a monarch’s voice
Cry “Havoc!” and let slip the dogs of war …”

Caught in a series of sub-standard locations, Tesco may find that hubris, as it must, brings its price as its American supermarket competitors decide to fight back and thus “…let slip the dogs of war…”

Michael Pollan’s Sustainability Arguments Unsustainable In
Context Of Economics

Michael Pollan is the author of numerous books related to the food industry and sustainability issues. Most famously he authored, The Omnivore’s Dilemma: A Natural History of Four Meals, which the publisher describes this way:

What should we have for dinner? The question has confronted us since man discovered fire, but according to Michael Pollan, the bestselling author of The Botany of Desire, how we answer it today, at the dawn of the twenty-first century, may well determine our very survival as a species. Should we eat a fast-food hamburger? Something organic? Or perhaps something we hunt, gather, or grow ourselves? The omnivore’s dilemma has returned with a vengeance, as the cornucopia of the modern American supermarket and fast-food outlet confronts us with a bewildering and treacherous food landscape. What’s at stake in our eating choices is not only our own and our children’s health, but the health of the environment that sustains life on earth.

In this groundbreaking book, one of America’s most fascinating, original, and elegant writers turns his own omnivorous mind to the seemingly straightforward question of what we should have for dinner. To find out, Pollan follows each of the food chains that sustain us — industrial food, organic or alternative food, and food we forage ourselves — from the source to a final meal, and in the process develops a definitive account of the American way of eating. His absorbing narrative takes us from Iowa cornfields to food-science laboratories, from feedlots and fast-food restaurants to organic farms and hunting grounds, always emphasizing our dynamic coevolutionary relationship with the handful of plant and animal species we depend on. Each time Pollan sits down to a meal, he deploys his unique blend of personal and investigative journalism to trace the origins of everything consumed, revealing what we unwittingly ingest and explaining how our taste for particular foods and flavors reflects our evolutionary inheritance.

The surprising answers Pollan offers to the simple question posed by this book have profound political, economic, psychological, and even moral implications for all of us. Beautifully written and thrillingly argued, The Omnivore’s Dilemma promises to change the way we think about the politics and pleasure of eating. For anyone who reads it, dinner will never again look, or taste, quite the same.

You can read the introduction and first chapter of the book for free, right here.

Actually, although Pollan is a gifted writer, one thing he is not is surprising. Hint — he is in favor of doing things the sustainable way.

He has become something of the Poet Laureate of Sustainability for The New York Times, with pieces such as these:

November 4, 2007
Weed It and Reap
The New York Times

April 22, 2007
You Are What You Grow
The New York Times Magazine

January 28, 2007
Unhappy Meals
New York Times Magazine

October 15, 2006
The Vegetable-Industrial Complex
The New York Times Magazine

This past Sunday, he had a piece in The New York Times Magazine entitled, “Our Decrepit Food Factories,” which you can read in full right here.

His focus is on trying to salvage some meaning for the word sustainability:

The word “sustainability” has gotten such a workout lately that the whole concept is in danger of floating away on a sea of inoffensiveness. Everybody, it seems, is for it whatever “it” means. On a recent visit to a land-grant university’s spanking-new sustainability institute, I asked my host how many of the school’s faculty members were involved. She beamed: When letters went out asking who on campus was doing research that might fit under that rubric, virtually everyone replied in the affirmative. What a nice surprise, she suggested. But really, what soul working in agricultural science today (or for that matter in any other field of endeavor) would stand up and be counted as against sustainability? When pesticide makers and genetic engineers cloak themselves in the term, you have to wonder if we haven’t succeeded in defining sustainability down, to paraphrase the late Senator Moynihan, and if it will soon possess all the conceptual force of a word like “natural” or “green” or “nice.”

Confucius advised that if we hoped to repair what was wrong in the world, we had best start with the “rectification of the names.” The corruption of society begins with the failure to call things by their proper names, he maintained, and its renovation begins with the reattachment of words to real things and precise concepts. So what about this much-abused pair of names, sustainable and unsustainable?

To call a practice or system unsustainable is not just to lodge an objection based on aesthetics, say, or fairness or some ideal of environmental rectitude. What it means is that the practice or process can’t go on indefinitely because it is destroying the very conditions on which it depends. It means that, as the Marxists used to say, there are internal contradictions that sooner or later will lead to a breakdown.

The rest of the piece is quite interesting but mostly conjecture, trying to link “factory farms” to MSRA — anti-biotic resistant staph — infections and the collapse of bee colonies to the practice of bringing bees to California’s central valley to pollinate the almond crop. All very intriguing and certainly falling in that large category we call “interesting, if true.”

But with all the focus on sustainability, it strikes us that his efforts to define the word “unsustainable" is important and, also, that his definition is unsatisfactory:

What [unsustainable] means is that the practice or process can’t go on indefinitely because it is destroying the very conditions on which it depends.

This definition denies the nature of economics in which the sustainability of a practice, as with the supply of an item, is directly related to the price.

So, if we are using, say, oil for energy and we are taking it out of the ground faster than new oil is being created, this would, according to Pollan, be unsustainable.

Yet, in reality, we will never run out of oil. Why? Simple: as we continue to use inexpensively available oil, the price will rise, and as the price rises, several things happen:

On the demand side:

1) Higher prices lead to conservation and thus lower demand than what would have existed if prices remained lower.

2) Higher prices lead to different choices being made — say how long a commute is acceptable or the energy efficiency of an appliance. This reduces demand further.

3) The return on investment in research to save energy is higher and thus attracts more investment, leading to more advances in reducing demand.

On the supply side:

1) Higher prices justify expensive exploration under progressively more difficult conditions, thus continually increasing the amount of recoverable oil available.

2) Higher prices justify the use of techniques to increase yield from existing oil fields, thus continually increasing yield.

3) Alternative energy sources immediately become competitive with some uses of oil and thus take over market share.

4) Higher prices justify the investment in research and development on alternative energy so these options become more competitive over time.

The net on all this is simply that the price-setting mechanism is such that supply and demand must always be in balance — so we will never run out of oil.

Sustainability has to always be viewed in this broader context. It makes perfect sense for a society to use up the “low hanging fruit” first and then move on to more expensive options.

In the article, Pollan says this:

For years now, critics have been speaking of modern industrial agriculture as “unsustainable” in precisely these terms, though what form the “breakdown” might take or when it might happen has never been certain. Would the aquifers run dry? The pesticides stop working? The soil lose its fertility? All these breakdowns have been predicted and they may yet come to pass. But if a system is unsustainable — if its workings offend the rules of nature — the cracks and signs of breakdown may show up in the most unexpected times and places.

From this, he goes off to explore MRSA and the bee colony collapse, but his point, that, for example, the use of a pesticide may not be sustainable because one day insects may acquire a resistance to that pesticide, is not really an argument at all.

After all, we could release lady bugs to kill insects and, as the survivor insects are those selected for the trait of being able to avoid lady bug detection, that method may one day no longer be effective.

By this criteria, nothing can be certain to be effective forever.

We are more inclined to turn to Stein’s Law first pronounced in the 1980s. Herbert Stein was an economist, author and Chairman of the President’s Council of Economic Advisors. He developed Stein’s Law in response to the argument in relation to a balance of payments deficit that this condition “simply could not go on forever”:

If something cannot go on forever, it will stop.

Dr. Stein was a sharp cookie and his point was that merely because one believes something can’t go on forever, there is no reason to say we have to do something about it. What we mostly have to do is make sure that we stay out of the way of the pricing mechanism.

Want a shortage of energy? Just impose price controls. Want a shortage of food? Ban the practices that people have identified as unsustainable.

Wayne McKnight To Leave Wal-Mart

One of the great joys of attending the Canadian Produce Marketing Association convention is that its small scale allows for an intimacy that the large US conventions simply lack. One of the privileges that the Pundit has enjoyed over the years at that event was to sit down with Wayne McKnight over a coffee or a drink and soak in the wisdom.

Wayne is the Vice President of Global Procurement for Wal-Mart and before that was active in his native Canada at Sobeys, Co-Op Atlantic and the Oshawa Group.

More important than the resume is that Wayne has a remarkably supple mind. He is a brilliant strategist, not merely knowledgeable, but genuinely insightful. There are really very few people able to see what he sees.

He also happens to be a genuinely good person. When the Pundit has tried to raise money for various causes, he is one of the few who lifted a finger to help.

So a brilliant mind and a good man… and Wal-Mart is letting him go back to Canada??? It speaks volumes for how the top executives at Wal-Mart have become detached from what is really needed to succeed.

It is also part of continuing brain drain as industry luminaries, such as Bob DiPiazza and Bruce Peterson, have also left Wal-Mart.

What they will do with Wayne’s position, how Wal-Mart will reorganize after he leaves… all this we don’t know.

We do know that this is a big loss for Wal-Mart in one of its most important initiatives, and his availability will be a big gain for some lucky food company.

Wayne is working through the end of January. We wish him every good fortune in the next stage of his career.

Pundit’s Mailbag — Protocol Lesson For
PMA Education Foundation Students

Our piece introducing the new board of the PMA Educational Foundation and highlighting the Foundation’s initial fundraising efforts brought this comment from the chief executive of a company that has fertilized the industry with many people it brought in on an entry level:

I just read the Pundit article, PMA Education Foundation Looks To Attract And Retain New Industry Talent. That is a lot of money that the foundation has raised. Congratulations are in order!

I do have a real life commentary. Although I am not on the foundation board, nor have I been asked for my input or feedback… it is no secret that our company is quite a supporter of young people and has brought more than our fair share into the industry.

So, it was not really a surprise to me that at least 8 of the scholarship winners were personally escorted to our booth at PMA (by their mentors) and I personally met with them (and their mentors).

I did the same thing with all of them. After spending at least 10 minutes with each visitor, I gave them my card, and took theirs, when they had them. And I asked them to follow up with me and send me an email after the show. Maybe it was about an internship, or some follow up to our discussion.

I did not hear from ONE of them. Not one.

If our industry is committed to bringing new young people into the industry… then we probably need to do first things first and teach them “business protocol”. Frankly I was disappointed that their mentors or the training staff hired by PMA did not emphasize the importance of follow up in business to these “outstanding students”.

I know it makes those that have hundreds of thousands of dollars available to donate to the PMA foundation “feel good”… but the reality is, it should NOT be about making the donors feel good. It should truly be about recruiting new life into our industry.

I think a little more depth is needed in this program.

Our correspondent is writing in reference to an annual program that predates the Foundation. The program was established in 2004 by the generosity of Jay and Ruthie Pack — former owners of Standard Fruit & Vegetable in Dallas. The Pack Family/PMA Career Pathways Fund set about to bring to each year’s PMA convention students from select colleges.

Initially the participants were drawn from California Polytechnic State University, Cornell University, Michigan State University, St. Joseph’s University, Texas A&M University, and University of California at Davis.

By 2007, the program had expanded, retaining all the original schools and adding a new US school plus reaching out to Chile, Australia and South Africa:

Pontifícia Universidad Católica de Chile (Chile)

University of Florida (USA)

University of Pretoria (South Africa)

University of Stellenbosch (South Africa)

University of Queensland (Australia)

The Pundit has been honored to be a part of the program since its beginning, having been asked by both the Pack family and PMA to serve on the Steering Committee of the program.

Pundit sister publication, PRODUCE BUSINESS, also is privileged to put on its Rising Star reception, with help of generous grants from both The MIXTEC Group and Ocean Mist Farms, to honor both the PRODUCE BUSINESS 40-under-Forty winners and the Pack/PMA Career Pathways Fund students.

In its conception, the program is certainly brilliant — bring students to the trade’s largest event so they can realize the enormous potential the produce industry holds for a young person soon to set out on his or her career.

By and large, it has been enormously successful in the sense that the students are typically bowled over by the event and awakened to the possibility of a career in produce.

Many are now working in the industry.

At the same time, there are, of course, problematic issues. For example, there is no easy way to determine how many of these students would have selected careers in the produce trade without such a program.

The only thing we can say is that the mentors that have worked with the students, and the students themselves, generally report that the program was important in awakening the students’ interest and expanding their knowledge of the produce industry.

This conforms to the experience Jay Pack had back during his days running Standard Fruit and Vegetable. If Jay and Ruthie are the parents of the program, Dan’l Mackey-Almy of DMA Solutions was the midwife. She, working for Standard, spent countless hours working with faculty at Texas A&M to bring key students over to the Standard facility in Dallas.

The program in Texas is not focused on produce and, for many students, that visit to Dallas was their first exposure to the industry. Many students wound up coming to work at Standard and enriching the industry with their talents. It was this experience that led Jay & Ruthie to launch the program.

Of course, bringing a few students from college to a produce company is not exactly the same as bringing an army of students and faculty advisors from the four corners of the globe to PMA, so this has certainly been a learning experience and each year the program has improved.

Little things mean a lot and when our letter-writer mentions the students with business cards, we recall how the first year the big complaint was that none of the students had business cards — so, the following year, the program started giving business cards to every student.

One can imagine a hundred reasons why our correspondent never got a call or e-mail back. The geography of the industry is an issue, with many students restricted in where they want internships or jobs. The age of the students varies and not all are ready for jobs. Some, even after the experience, may elect to pursue careers in other industries.

And, of course, one company does not a complete portrait make. Since several of the students are working in the trade, there must have been some communication going on somewhere.
Customers have to be aware of a few key points that hold meaning during choosing the proper custom essay writing service.

We don’t want to start sounding like Paul Lynde, but maybe these highly select students now expect to be wooed by companies rather than asking for internships and jobs.

Of course, none of this is an excuse and we think our correspondent’s suggestion of integrating a program in which we both try to teach students how to get the most out of business events such as this and, perhaps, even establish some expectations is a fine idea.

In fact, I am not sure we should limit it to the students. Although our correspondent runs a highly professional organization that attempts to maximize the value of its exhibiting budget by ensuring proper follow-up, we often hear complaints from attendees of exhibitors failing to follow up with inquiries made on the trade show floor.

Plenty of industry executives complain that their calls don’t get returned. Tesco thought it was OK to hand out business cards with a fake phone number on it that would never be answered.

It seems like rudeness and irresponsibility is, unfortunately, part of the zeitgeist of the times.

We are, however, not doing the students any favor by letting them get away with it. We should certainly take action as part of our 2008 planning.

Many thanks to our correspondent for pointing out a real value that can be delivered to the students in the program.

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