Chapter 2 – Competitive Advantage

Strategy in business, sounds almost like a necessity right? How can a business run successfully if it doesn’t have a strategy? Oh I know, it doesn’t! Companies spend millions of dollars each year refining strategy and doing market research, running data analytics, hiring Consultants to forecast change, etc., all with the intent to improve profits for shareholders (if they are publicly traded) and GROW!

I took what I learned on strategy from Chapter 1 and researched how Simon Property Group (SPG) uses it and how they use it to further their competitive advantage and in turn their financial performance. First, what’s the mission because clearly the mission says everything I need to know. Surprisingly I spent a good 30 minutes searching for it and could only find it on some third party website and even though this is just a blog, I would prefer not to blog potential fake news.

So what is Simon’s mission and does it show their strategy? Well, your guess is as good as mine but I combed over their 2018 Annual Report to try and find what their strategy is and found it and they are:

• Focus on the ownership of high-quality retail real estate
• Increase presence in major metropolitan areas
• Own assets along the price spectrum of retail real estate, dealing with the barbell effect (from value to luxury consumers)
• Lead the industry in promoting their shooing destinations as “Marketing Medium” and connecting with the community and consumer directly and being less reliant on retailers to do that
• Densify well-located real estate with elements that foster a live, work, plan and stay environment including apartments, office, hotels, entertainment, restaurants, and health and wellness
• Lead the industry in successful and profitable acquisitions where value can be added
• Export their “know-how” internationally

Wow, that is a lot of information to grasp and can really go many ways. I am not here to critique their strategy but rather review exactly what they are doing and does it match who they are as a company. Simon is a mall developer and by now almost everyone in America is aware the mall industry is struggling. Retailers are going out of business and consumer demands are rapidly changing, so how is it that Simon has managed to weather the storm and continue to turn profits in an otherwise dark industry. The answer is simple, clear concise focus on what they want and how they are going to get there. That is the definition of strategy. Do I know if increasing a presence in a major metro area will drive profits? No, but do I know Simon has focused on that and followed through (at least in 2018/2019) with that goal in mind and profits have gone up, yes!

So now how does Simon use this towards their competitive advantage?

In doing research on a REIT (real estate investment trust) it is only common to see goals of acquiring net positive investments or doing remodels/expansions on the target areas for improvements, but innovations? My eyebrows went up when I saw innovations on targets for improvements and dug in to see exactly what that meant. Simon (it turns out) is an innovator when it comes to the shopping experience (explains why they are doing so well). In 2018 they focused heavily on their “online” presence and creating a consumer experience that drove traffic to their malls. They did this with digital platforms, mobile applications that allowed consumer to order food (since malls always have options but everyone hates fighting traffic to go there just to eat), applications geared towards parking maps (another big problem in the mall industry – finding parking), and just overall changes geared towards consumer interaction with the mall itself and not just a store. It’s unique but it is working.

In addition, Simon has focused exclusively in outlet malls vs traditional retailer driven malls. An outlet mall sells name brand clothing at a discount. I personally think it is crazy to go to Dillard’s and pay $75 for a Ralph Lauren polo when you can go to a Simon outlet mall with a Ralph Lauren Outlet in there and buy that same shirt for $40. Simon has created a big advantage to its competitors by focusing on discount retailers and driving foot traffic where other stores are burdened with the non-stop price comparing with Amazon or other online retailers.

So just how has Simon’s decisions helped them stand out from the competition? Let’s take one of their major traditional mall retailer competitors, Macerich.

Simon Property Group

2018 Total Revenue Growth +1.8%
2018 Net Income +20.2%

Macerich

2018 Total Revenue Growth -2.6%
2018 Net Income -143%

The numbers in the comparison speak for themselves. Macerich owns a lot of malls throughout the Country and are a massive billion dollar REIT out of California that knows what they are doing, unfortunately they have fallen victim to the online shopping shift and their financials are showing it.

In chapter 2 we learn a lot about a companies competitive advantage and how it can impact their financial performance. Simon has clearly shown they are doing things (or creating things) that make their shopping centers stand out from the rest of them. Whether it’s innovating the shoppers experience or focusing on retailers that typically drive higher foot traffic and what they are doing is working. Simon’s YE 2018 net earnings was up 20% from 2017 and almost 25% from 2016! That’s growth and numbers any business would love to see.