Chapter 11 – Diversification

Simon Property Group has been diversifying its business strategy for many years. SPG is a retail mall developer and typically their tenant negotiations are with big box retail tenants and in-line mall tenants. It is not until recently that SPG has begun diversifying its tenant mix at their mall locations to help drive traffic. At the College Mall in Bloomington an defunct Sears was demolished and replaced with a Whole Foods. You do not typically expect to see a major grocery tenant at a regional mall, however it is this out-of-the box type thinking that has helped Simon Property Group weather the cyclical storms of retail and fight off online retailers such as Amazon.com.

In 2013 Simon Property Group did the opposite of diversifying and spun off it’s strip centers and small enclosed malls. Understanding complimentary business lines is important for the financial survival of companies. Sometimes diversifying isn’t always good and you need to backtrack and dispose of that idea before he negatively impacts you financially. In the case for Simon, the strip center tenants were different than the ones they were used to negotiating with. In addition, it’s a completely different type of management. You go from managing local smaller retail type tenants to large national financially healthy tenants. Simon noticed the differences and the fact their earnings were not what they were budgeting for and therefore divested those assets in order to focus on what they were good at, regional malls.

Sometimes diversification comes from the inside and isn’t as easily noticeable as an acquisition or divestiture. A number of years ago Simon made the business decision to eliminate the outsourcing of their property tax appeals. This doesn’t sound like diversifying, however by in-housing this function of tax you are bringing in a completely new line of services offered at your corporate offices. Simon went out to the marketplace and hired experienced retail property tax consultants and had to find a compensation commensurate with the results they will be bringing in. This is not typical for a major corporation this size to in-house appeals, however by doing this you are eliminating 25%-35% consulting fees. Based on conversations with Simon’s property tax director, they reduce their property taxes liability annually by $25M-$35M. If you were paying someone outside of your firm to do this it would cost anywhere from $6M-$12M. Imagine the savings you obtain by hiring employees direct, even if your overhead increases $1M annually, the net result will always be positive.