Thursday, June 23, 2005

Putin’s New Campaign Slogan: “Live Lousy, Die Young & Buy Your Oil From Me”


The most interesting thing I heard this week at a conference with a broad range of companies as boring as Home Depot and as comical as TurboChef Technologies was the blunt assessment of the Russian situation by Wal-Mart’s CFO, the sharp, knowledgeable and quick-witted Jay Fitzsimmons.

Jay, like all Wal-Mart higher-ups, has a very broad knowledge of a very large slice of the world’s economies, and he always has something interesting to say about topics far beyond the usual why-were-comps-below-plan-last-week? nonsense that most retailers end up getting asked on their conference calls.

To put Wal-Mart in perspective, sales will top one-third of a trillion dollars this year. It’s adding $30 billion to sales each year—almost two JC Penneys. And for the typical U.S. consumer products companies ranging from giants like P&G and Colgate to little guys like Acme United and Jarden, Wal-Mart is 20-25% of sales.

So whatever Wal-Mart has to say about the world at large, it’s always worthwhile.

For one thing Jay takes the PIMCO side of the bond trade, saying “there’s not much” inflation in the Wal-Mart shopping cart.

In the food category, which is important to Wal-Mart given the successful roll-out of the company’s huge food/merchandise “Supercenters” over the last decade, inflation is running 1.8-1.9%.

General merchandise prices, however, are deflating at a 1.3% clip. Summing up inflation on the one-third of a trillion dollars that Wal-Mart handles, Jay says “it’s flat on average.”

That was interesting, but not as interesting to me as the discussion about Russia. It is impossible to talk about the future of Wal-Mart without talking international—particularly the opportunities in China, which are, of course, huge; as well the two other large and under-developed countries: India and Russia.

Turns out India does not allow direct foreign investment in their retail sector, so Wal-Mart is not going to participate in that country’s growth any time soon.

But Russia is wide open, and Wal-Mart looked closely there, and was about ready to go…but pulled back following Putin’s hostile takeover of Yukos, the country’s largest oil producer.

As Jay summed up the Russian government’s hostile attitude toward capitalism: “they see a good business—they want to nationalize it.”

Putin might get away with taking whatever he wants to take—a couple of weeks ago it was a newspaper; before that it was a TV station and an oil company. He’ll certainly get even more rich and more powerful than he already is.

Meanwhile, great companies like Wal-Mart with the cash and human capital that could have provided an invaluable engine of growth for the poor shlubs who live under Putin (male life expectancy: 59 years) are investing their money and their knowledge elsewhere.

The Russian Crisis of 200X approaches.


Jeff Matthews
I Am Not Making This Up



The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

23 comments:

smartins said...

I hope so.

mrgnofsafety said...

What did you think of Turbo Chef?

Ajay Shroff said...

Love your blog. It's so difficult to find a good business blog and you have a new frequent reader.

cdub said...

At least this time we don't have to worry about LTCM...

Jeff Matthews said...

Thanks for the feedback.

As for TurboChef, I think it is like every eventual-short I have ever seen: a supposedly great product with a big roll-out already done (the Subway roll-out) and a new one coming (Starbucks), in a field that is dominated by companies (like GE) that probably won't sit around scratching their heads and leaving this great new product area alone for long.

And the management team was really scary, in a relentlessly touty way.

That said, I wouldn't be short until I have checked the product itself, since I heard enough positive feedback second-hand to make me want to see if this really is--as the relentlessly touty guy said--the next big thing to hit the house since flat screen TVs.

gvtucker said...

TurboChef has been relentlessly touty for about a decade now. And their story hasn't changed. Heck, for a very long time I thought TurboChef was no different than CopyTele, a relentless hype that never had anything behind it.

I'll give them credit, at least they finally came out with real revenues to back the hype. All that said, the way they promote the company just screams for this stock to be shorted. Maybe I'll wait for Carlton Lutts to call this the next Presstek, first.

mrgnofsafety said...

I happen to agreee with you on the eventual short side.

That being said the product does seem to work. The problem is that for this comapny to be successful in the long-term, they have to find a way to break into the reisdential market, and that product is not going to be easy on the wallet.

I believe that they are looking to charge between 4k-6K per unit, obviously at the high end of the market.

As a home owner, how do you justify spending that kind of money on a second unit? Now, they obviously feel as if it will replace the conventinal oven, but convincing a housewife to throw out her standard oven for some new fangled technology is going to be very difficult. (See Accellis from Maytag; now discontinued)

MD said...

Jay is a great guy, but I think he's the Treasurer not the CFO.

Mad man on the water said...

'MD' is correct. Jay is SVP Finance/Treasurer per Bloomberg. Mr. Matthews has to stay after school.

Mad man on the water said...

..and it's JAKE not Jay. So sorry. Looks like I have to stay after too.

Ed said...

I'd actually like to differ on the subject of Russia. While I do agree with your assessment that Russia will likely face problems, I don't think Wal- Mart made a particularly astute comment about "nationalizing good businesses".

Quite simply, Khodorovsky was a potential competitor to Putin - fabulously wealthy due to mineral deposits, and critical of his regime.

"Before that, it was a newspaper...a TV station"

Think about it: the newspaper and TV stations were also critical of his regime. He took them over, they became less critical.

The theme that unites these cases is not the quality of their underlying business, it is a) their attitude towards his regime, and b) their ability to impact his power.

So, based on this evidence is Russia a good place to be for capitalists? No.

Is Jeff right that moves like these set the stage for a potential crisis? Yes.

Is Wal-Mart correct about the Russian propensity to nationalize good businesses? I'd say no. Wal-Mart was simply - and rightly - scared by the operating environment, which is a sentiment I've (unfortunately) not yet heard from America's financial institutions so eagerly moving into the country.

- Ed

BelowTheCrowd said...

In response to mrgnofsaftey's comment, it's worth noting that the Maytag Accellis (actually sold under the Jenn-Air name, if I'm not mistaken) WAS TurboChef technology. Maytag gave them over $12m in R&D funding, in addition to significant spending on manufacturing, marketing, etc. MYG eventually walked away and returned the rights to the products to TurboChef.

While one could criticize MYG management over the past few years, I suspect that this particular decision was one of the good ones.

As noted, the concept didn't catch on, even with MYG behind it and I find it somewhat laughable that a no-name company would be able to do better in the home market on their own.

-btc

BelowTheCrowd said...

I'll disagree with Ed too, at least to some degree.

Any business that gets big enough is going to be a threat to somebody, somewhere in government and in the various other power structures. Or at the very least is going to find itself having to work with government on all sorts of issues. These kinds of things will inevitably be seen by some as "challenging government."

It is simply impossible to run a large successful business anywhere if they rule is "you can't piss off the politicos." WMT pisses off politicians and others all over the US. Imagine if their business could be closed down and their executives thrown in jail for nothing more than their aggressive management style. That's Russia today.

Incidentally, this kind of sentiment exists elsewhere as well. One need only look at German and French comments about foreign investments. None of these have anything to do with business efficiency, or with threats to national sovereignty. They have everything to do with the fact that successful capital shakes up the cozy power structures, ingrown boards of directors, and "public/private partnerships" that typify those countries. Russia merely takes this to the next logical extreme.

-btc

telemusor said...

Wal-Mart should see how IKEA Moscow struggles with 30 mins. wait to get out of the parking lot because of all the customer traffic. Jay is sharp, no doubt, but also is arrogantly and near-sightedly missing a big-upside market with manageable risk.

Its_strange said...

Putin would nationalize a USA company listed on the NYSE ? ....Time to get real

MD said...

Jeff,

Although this is unrelated to your most recent post, I was wondering what your take was on Karl Rove's diatribe about liberals wanting to offer therapy to the 9/11 terrorists. You decried the over-the-top comments of Howard Dean, but I think Rove's remarks display similar loopy partisanship. TIA.

BelowTheCrowd said...

It's Strange,

I don't find it all that inconceivable that Putin might decide to take over the assets of a company -- even a foreign company -- that he decided was rocking the boat too much.

Certainly he can't nationalize a foreign business, but he can effectively take their investment away and kick them out of the country.

WMT has decided that the risk to operating there is too great. Given that they are typically a highly disruptive force in any market they go into, I don't find it all that odd. Their business model is to rock the boat (or in extreme cases, to sink the existing boat and replace it with their own yacht). They realize that in a place like Russia that can't work. So they choose to stay away.

It doesn't necessarily follow that everybody should stay away, but suggests that unless you're the kind of business that is able to maneuver very carefully through an intricate political environment, it is perhaps not a good place for you to be.

WalMart has had a tough time negotiating the political realities of large American cities like LA and has run into trouble in Canada. Their entire business model is based on operating in places where those kind of pressures are limited. I can't blame them for avoiding a place like Russia.

-btc

Its_strange said...

I can understand not wanting to do business in Russia but WalMart claiming fear of being nationalized is OTSK like nonsense. Putin knows WalMart is America ............I find Jay's comments silly

Its_strange said...

What will be the USA reaction to a Russian crisis ? What if it hits while the housing bubble goes bust ? ......What the outcome of the Russian crisis ? Bush bails Putin out ? .....Beats me

Jeff Matthews said...

Don't take Jay's comment about the problem of doing business in Russia ("they see a good business--they want to nationalize it") too literally.

Jay was summing up the heart of the problem of making a major committment to that country, which is the fact that at the end of the day there is no protection from the will of the Russian State, even in courts of law.

He did not literally mean that Wal-Mart might become so attractive to Putin and his buddies that Putin would risk an international incident by trying to nationalize Wal-Mart stores.

As "telemusor" pointed out, IKEA does land-office business in Moscow, and it's worth noting that McDonald's highest volume store in the world is in Pushkin Square.

But IKEA and McDonald's stores are often franchised, unlike Wal-Mart, which operates only corporate-owned stores. A Russian IKEA franchisee would put up the capital and take the capital risk in the event Putin decides, like the Godfather, that he wants to own a legitimate business.

IKEA the corporation would lose nothing but the royalty.

Any information on how IKEA structured its Russian venture would be interesting and welcome.

Its_strange said...

I see OSTK bought privately held, Utah based online travel service Ski West which was founded in 2001..Hmmm....diamonds, gifts, travel...Whats next ? OSTK offers weddings for one set price ? Like the cruise lines ? .....Who owns Ski West now ?

smedley said...

Before we conclude from the imprisonment of Michail Khodorkovsky and the nationalization of Yukos that capitalism -- Russian style-- is heading towards ruin, we need to ask ourselves a simple question:

how did the "Russian Oligarchs" -- men like Khodorkovsky, Vladamir Gusinsky, and Boris Berezovsky -- in the anarchy following the collapse of Soviet Communism, acquire their massive fortunes? By what means?

Only by understanding the "questionable" methods these men used to solidify their power in post-soviet Russia can we understand the actions of Putin.

Which is just to say the Russian capitalism is in ruins, just not for the reasons we think it is. It was ruined from the begining. The outcome of this disasterous journey is anybody's guess.

National-Socialism, perhaps?

William said...

Fantastice blog you got here, I will deffinitely be back to see the updates you have made. I have a website that you might find interesting. It pretty much covers
denver real estate

denver real estate