Chapter 6 – Cost Leadership

In Chapter 6 we learned about Cost Leadership and how companies can excel over competitors (or struggle) as a result of costs associated with business. These costs can come in the form of an advantage or a threat and need to be aligned with Management in order to fully be taken advantage of.

Simon has several “costs” that can be an advantage or a threat.

1. The cost or threat of entrants into their line of business is high, extremely high.

I don’t think the average person knows what all is associated with developing a retail shopping center in today’s environment. Think of it as a buyers market for housing in real estate, except in retail the number of buyers is extremely small and the number of supplies is overwhelmingly high. Simon has invested in “Class A” locations that are highly desirable with a tract record of retail success. Example: I live in Nashville, TN and Simon owns the Opry Mills Mall, which is one of their highest grossing retail centers in the Country. Opry Mills is not located downtown or the heart of the central business district, it is off site about 10 miles away. So why has this been so successful? Well, for starters it is attached to the Gaylord Opryland Hotel as well as the Grand Ole’ Opry. These two places alone bring hundreds of thousands of tourists each week to the area and what better way to “kill” time than to walk an outlet mall. For this to be replicated in Nashville would costs hundreds of millions of dollars and the right partners (or in this case, nearby attractions) for it make sense so the barriers of entry to compete are stiff.

2. Threat of substitute is high. As much as barriers to entry being a cost advantage, it could also be a huge threat. What do you do if you can’t afford to compete with the “big guys?” You create an alternative and don’t compete directly, but indirectly. The threat to online shopping is the single most frightening threat to the retail industry. If you eliminate the overhead expense you can afford to sell items with smaller markups and reduce costs that eliminate the need to even go in a store, which is why the threat of substitute is such an important focus point for retailers.

Other costs advantages Simon has is its economies of scale, cash availability, and technology. Simon has the ability to control operating expenses easier due to its sheer size and with the success it has had, is able to pay a very attractive $8 dividend (has increased $5 over the past 7 years) or 5.3% annualized return on your investment. Last, with its economies of scale it also has the ability to research in R&D and excel technology that has improved efficiency and provided competitive advantages.

These are some of the cost advantages or threats Simon Property Group has and the company management does a great job in capitalizing on the advantages and minimizing the threats.