Why taking ICA private could make sense?
© icahandlaren.se
The other big Nordic retail news of the week was the offer that the ICA Traders’ Assocation made to make the Swedish grocery retail giant ICA Group private again. Many have asked why this kind of drastic action? Why would the Traders want to take ICA out of the stock market?
Whatever the reasoning for this was for the Traders, there are some aspects that for an outsider seem relevant.
The most obvious answer to think about when considering the type of ownership ICA Group has, are the quarterly pressures provided by the public ownership. In the stock market the numbers for the quarter need to be reported transparently. The stock market has a lot of short term investors who can create a lot of turbulence and unnecessary pressure for the management group of the company. This has been highlighted especially in the US with some hyped up shares such as Game Stop.
On the other hand, the entrepreneurship model of the ICA Group tends to be built on a much more longer term thinking.
The average time a Trader operates an ICA store is counted in years or decades, whereas many investors think about months or quarters.
Was Ocado deal a result of short term pressures?
One example of this shorter term thinking arising from the public market investors could be the deal ICA made with Ocado. It was a big, bold, swift and expensive deal. One can’t help, but think how the external pressures from the stock markets and analysts have influenced the decision making.
Prior to Ocado deal ICA did not have any real problems with online.
Yes, online had grown in revenue.
Yes, picking of online orders created some problems to the stores.
Yes, ICA had to do something to develop online.
Yet, by the time of the deal ICA was already the biggest online grocery retailer in Sweden.
The problems in the stores created by the growing amount of online orders, could have been managed in a much more incremental and cheaper way.
After all, Tesco has achieved £6 billion in online revenues (13 % of overall revenue) with a very conservative approach. Tesco has always been much bigger than one of it’s online rivals, Ocado. However, Ocado had a great story to sell to ICA management. High efficiency, a lot of automation and number of big international brands as partners. It is easy to see why that narrative may have felt as a very good idea.
Advantages & disadvantages of being a public company
Some of the more general benefits of being a public company are related to the ability of the company to raise capital and compensate employees. ICA doesn’t necessarily need cash influxes as the core business of ICA Sweden generates a healthy annual profit of 350 to 400 million €.
On the other hand, being a public company generates more reporting and transparency towards the markets. That often also leads to higher pressures from the short term investors. Additionally with regards to ICA being a transparent public company can generate more scrutiny from the authorities.
The public scrutiny could become a problem if ICA were to grow even more.
With a market share hovering around 50% of the entire market, further growth could generate quite a lot of interest from the public authorities.
Not a growth business -> focus on the core
Thus, from the stock exchange perspective the market share of ICA is so big that the company has little upside to grow in Sweden. This lack of growth potential has pushed the ICA Gruppen to invest in other businesses, such as the pharmacy business in Sweden and the Rimi grocery business in the Baltics. It is easy to see them as sidetracks to the core business of Sweden operated by the biggest owners of ICA, the Traders.
As a private company ICA could become more straightforward in terms of decision making and profit sharing. As a private company it would also make sense for ICA to focus on Sweden and mainly to groceries.
Why have businesses that either are not for the entrepreneurs or would not benefit the entrepreneurs?
Therefore, one can see that the Rimi business in the Baltics could be sold off to free up some cash to invest back to the Swedish operations. On the other hand Apotek Hjärtat and especially ICA Bank can be seen as good add ons for the grocery business. They provide customers for the stores and provide additional service for those customers.
Focused, efficient and more competitive ICA?
In the current model ICA Group has to be profitable in two directions: for the Traders and the private shareholders. As a public company, ICA would not need to consider any outside shareholders and thus ICA Group would not really need to make any profits. Everything ICA Group does is to make it easier, more efficient and fundamentally more profitable for the Traders to do business by selling groceries in Sweden.
Willy’s has outgrown ICA during the last years
This removed layer of profitability could used partly to increase the profitability of the Traders, but also to invest in the important growth levers of the business: digital services and prices. Especially prices have been quite a significant challenge for ICA over the last years as Willy’s has really been able to outgrow ICA for a number of years already.
By lowering prices ICA would become quite a lot stronger and more competitive grocery retailer in the long run.
To summarise one can see that ICA Gruppen as a private company would be more efficient and straightforward retailer for all the stakeholders. The voice of the retailer would probably be heard even better, when there would not be other stakeholders for the people in the headquarters to think about. After all, the headquarters of ICA Gruppen is a service organisation founded to serve the Traders.
Fundamentally ICA Gruppen is there to provide the Traders with
- marketing expertise
- data analytics to help build the assortment and store level marketing strategy
- volume and leverage to the sourcing discussions with suppliers
- efficient logistics
- and most importantly planning and development of the stores and the overall network of stores.