Slim Domit’s billion-dollar bet: Carlos Slim Domit has scored a string of successes for Grupo Carso in Mexico. But can he translate his retailing prowess to the us market? – Mexico Special Report
Daniel J. McCosh
Carlos Slim Domit’s work space is not what you would expect. The offices of the 34-year-old chairman of Mexico’s No. 2 holding company (the largest is chaired by his father, Carlos Slim Helu) are reached through the suppliers’ entrance of a Sears store in Mexico City.
The hallway carpet is a dirty beige and the white wails are occasionally marked with a handprint. In the corner of an ad-hoc waiting area are a broom and some cleaning supplies. You might even miss the office, expecting the neighborhood to suddenly turn more upscale. But the only imposing doorways in the hall are the exits to the mall-side of Sears.
The office itself is cleaner than the hallway but still sparse. There are no windows, and the walls are lined with posters from Sears ad campaigns. Is this any place for the chairman of a corporation that does more than US$9 billion in revenues per year? “It sets an example,” says Gordon Lee, an analyst with Goldman Sachs in New York. “That kind of cost-consciousness filters down through the organization.” Says Slim: “The basic principle is to be close to your operations.”
As far as Sears is concerned, that principle has apparently worked. When it was purchased by Grupo Carso in 1997, the year Slim became chairman, Sears de Mexico was a chain with double-digit operating losses. Slim renovated stores, cut out layers of management, and aggressively promoted Sears credit cards and a more upscale store image. By the end of the year, the company was in the black; today it is the most profitable chain in its class.
Being close to the conglomerate’s other operations may prove more of a challenge for Slim, but so far it has not hindered its success. Grupo Carso operates everything from bakeries to railroads, with a recent appetite for retail chains. During the five years that Slim has been at the helm, Carso has developed a reputation for efficient cash management, savvy reinvestments, and an aggressive growth strategy
Nothing, however, compares with the audacity of last year’s decision to invest approximately US$1 billion to acquire CompUSA – US$800 million for the purchase, plus US$136 million in assumed debt and US$86 million previously spent to acquire a 14.8 percent stake. The move effectively doubled the size of Grupo Carso, which took a 51 percent interest in CompUSA, with the remaining 49 percent going to America Movil, the wireless spin off from Carso Global Telecom (the holding company chaired by Slim Helu, itself spun off from Grupo Carso in 1996). Applying the conglomerate’s retail prowess to the US behemoth will test Carso’s management skills, not to mention Slim’s strategic understanding of the market.
Although many US analysts see CompUSA as a troubled retailer past its prime, Slim sees it as a key brand for innovative technology “We are convinced that we are seeing a new era where personal technology is going to be very important, and CompUSA is a company that has an image of technology that no other company in the market has,” says Slim. The idea is to move CompUSA out of the PC age and into the age of personal technology — with devices such wireless digital assistants.
While that vision is still unfolding, the immediate effect on the top line for Carso has been to radically increase the company’s revenue, from US$4 billion in 1999 to more than US$9 billion last year. However, the bottom line has moved in the opposite direction, with net profits falling from US$600 million in 1999 to US$300 million in 2000. While CompUSA has gone from a negative operating margin of 1.7 percent to a positive operating margin of 1 percent to 1.5 percent, according to Carso sources, net profits are still negative for the computer retailer. And the operating margin is still short of the market benchmark of 4 percent.
Still, the initial reversal of fortune is a first step in the right direction. Key to the improvement has been a restructuring that eliminated 1,500 jobs, divested the company’s online and telemarketing businesses, and moved COO Harold Compton to the top spot at Dallas-based CompUSA. However, Slim insists that the Carso philosophy is not based on cutting costs, but rather on increasing efficiency “Certainly we cut superfluous costs in operations, but the success of the company is not in cutting costs. Success is subject to being operationally viable,” he says.
Analyst reactions to the CompUSA move are mixed. “We’ve given him the benefit of the doubt,” says Juan Carlos Mateos, an analyst with Merrill Lynch in Mexico City. “He has a proven track record.” Others on Wall Street have yet to buy into the technology plan. Carso’s shares on the Mexican bolsa were selling in mid-July for 24 pesos, down from 47 pesos at year-end 1999, prior to the CompUSA acquisition. Although Mexican conglomerates as a whole have been hurt by the strong peso and a slumping international auto market, Carso was in a position to outperform its peers, given its high percentage of domestic sales and its move from the auto to the telecommunications supplier market.
“I think the timing was a little unfortunate,” says Goldman’s Lee, in reference to the purchase, which was made when technology stocks were at their height. Although Slim may be able to turn around CompUSA in the medium term, for the moment Lee described the financial markets as being in a “wait and see” mode. Security analysts’ valuations of Carso before and after the purchase attribute a neutral to negative effect on the company.
Investors were especially nervous when the purchase sparked a lawsuit against Carso that initially awarded US$455 million to the holder of a CompUSA concession in Mexico. The lawsuit argued that Carso intentionally used the concessionaire to access confidential CompUSA information and contacts, and then squeezed the original concessionaire out of the deal. A second ruling (both in Dallas) reduced the award to US$122 million. The transaction has further been soiled by a Securities Exchange Commission (SEC) investigation over insider trading by Slim’s outside legal counsel, who reportedly netted US$4 million in one day of trading for the attorney, friends and family.
Some analysts speculate that the stock dip resulting from the CompUSA purchase could lead Carso to dump the company from its portfolio in the near future. Slim, however, says they’re in for the long term. “When we make a decision like this, we don’t do it for the short run. We’re not a group that purchases companies to later sell them off.”
Slim lays the blame for CompUSA’s prior problems on the company’s focus on quarter-to-quarter results, instead of long-term issues such as customer service. He also says the company was on the road to losing brand equity “It is a company that got stuck in the PC era, and didn’t evolve,” says Slim.
If Slim does push CompUSA into the black, it won’t be the first time that he has proven critics wrong. “Nobody thought Carso was going to be able to turn Sears around and move it upscale,” says Merrill Lynch’s Mateos, who remains positive about Carso. Nevertheless, Carso bought Sears for US$150 million, while CompUSA cost almost six times that amount, and is in a foreign market.
The crucial question remains whether Slim can translate his success in Mexico to the US. Certainly, retailing is easier for Carso in Mexico, where there are fewer market players. The group can also leverage its purchasing clout in Mexico when negotiating inventories and publicity — as well as share warehouses among its different stores and cross-task within its thin corporate structure, a feature that brings efficiency to companies throughout the group.
“The companies are not operated as a corporation, but rather as a group of executives who know their operations well, and who are very close,” says Slim. “By not having a corporate staff we have fewer levels.” At the same time, it means less depth in management.
Even though he is not very bullish on the CompUSA purchase, Goldman’s Lee nonetheless recognizes the fundamentals of Grupo Carso. “They are extremely good at identifying what is inefficient, and extremely good at cutting the fat,” he says. “This is in sharp contrast to other Mexican industrial concerns.”
Although Carso is entering a much faster-moving, competitive market in the US, the Slim family is no stranger to the US retail environment. Among his private investments, father Carlos Slim Helu owns 14 percent of Officemax, 7 percent of Saks Fifth Avenue, 5.9 percent of Circuit City and a small stake in Office Depot. While these are financial investments — “totally passive,” says Lee — insiders nevertheless say that the Slims know these companies better than many of the executives who ran them.
While acknowledging that the US is a far more competitive retail market than Mexico — CompUSA will probably never see the 16 percent to 17 percent operating margins that Sears de Mexico enjoys — Slim Domit is confident that the basic principles that have built Carso will apply “The principles of commerce are the same throughout the world,” says Slim. “You need a good purchasing operation, good inventory handling and good client service, which doesn’t just mean good prices, but also complete product lines and good technical service.”
As clear as that mandate is for Slim, Carso’s roots lie not in retailing but in industrial production, something Slim is keenly aware of. Prior to the CompUSA purchase, most of Carso’s revenues came from its non-retail divisions, including cable and wire producer Grupo Condumex, mining company Empresas Frisco, tile maker Porcelanite, copper products company Industrias Nacobre and cigarette maker Cigatam. “The industrial portion of the group has had nice development and has continued its path,” he says. “Industry generally makes less of an impact on the general public. Nevertheless, many times their [financial] results are much better than those on the retail side.”
Indeed, it is through industrial companies that the Slim family built its initial fortune. Carlos Slim Helu’s first triumph was through Galas, a printing company that was on the edge of bankruptcy when he acquired it in 1976. The Slim family then gobbled up companies during the economic crises of the 1980s, starting with Cigatam in 1981, which generated enough cash to make a string of purchases in industries that ranged from paper production to tire manufacturing. While Sanborns was acquired in 1984, it was not until 1990, when Sum Helu acquired management control of Telmex, that the family’s public profile attained global stature.
“They’re not first movers, and don’t have to be the most popular” says Marc McCarthy, an analyst with Bear Stearns in New York, about the Slim/Carso operations. “But they are the most profitable.” Beyond key acquisitions and sales, he adds, efficiency has been a Slim/Carso hallmark. “They are more willing to cut out sections of management that other companies are not willing to do.”
That does not diminish the Slim family’s deft ability to create value through spinoffs and IPOs. A 1996 purchase of Internet service provider Prodigy for US$220 million netted US$140 million in February 1999 through an IPO of a 30 percent stake. When Grupo Carso became a confusing mix of telecoms, retailing and heavy industry, its Telmex holdings were spun off into Carso Global Telecom in 1996. In April 1999, Carso grouped retail holdings into Grupo Sanborns in a move that was accompanied by an IPO the same year. Earlier this year, the wireless holdings of Telmex were separated into America Movil.
Several analysts expect the next corporate permutation of the Slim family empire to be a separation of Grupo Sanborns’ retail operations from the rest of Grupo Carso. But don’t expect anything soon. “For the moment things will stay as they are,” says Slim Domit. “If we see that a division of the group in the future would be better for development, we will look into it. But for the moment we feel that the [existing] operation makes sense.”
Bear Stearns’ McCarthy points out that although a complete separation could give better valuations to the pieces, it would limit some of the flexibility that allows cash generated from industrial activities to be used for acquisitions in retailing. Adds Merrill Lynch’s Mateos, “When they do it they’ll probably do it quickly Aggressive management and quick decisions are part of their style.”
Regardless of whether Grupo Carso becomes Carso Industrial and Carso Retailing, there is little doubt it will continue to dominate the business niches within Mexico that family patriarch Slim Helu built his empire around. It will be his son’s mandate to translate those successes beyond the nation’s borders.
RELATED ARTICLE: Triple Play
It would appear that the Carso companies are becoming crowded places for the executives who share the Slim surname. As of 1997 all three of Slim Helu’s sons had entered the family business at high levels: Marco Antonio as chairman of Grupo Financiero Inbursa, Mexico’s healthiest bank; Patrick as vice chairman of Grupo Carso; and Carlos as chairman of Grupo Carso and CEO of Grupo Sanborns. Father Carlos Slim Helu kept the title of chairman at telecom spinoff Carso Global Telecom, as well as chairman of Telmex and its cellular spinoff America Movil. However, he stepped back to honorary chairman at Grupo Carso and Inbursa.
With three brothers spaced three years apart in three areas of Mexico’s largest holding groups, one might expect a sharp dose of sibling rivalry. However, Carlos says that’s not the case.
“It’s more of a concept of complements than competition”, he says, explaining that middle-brother Marco Antonio always had a penchant for crunching numbers while little brother Patrick was a fast learner for processes as well as a good salesman. “From the family, one of the values is work, but not work viewed as professional development or ambition to grow or economic ambition, but a responsibility with yourself and others.”
Far from being a billionaire playboy, Slim Domit appears to wear the weight of his company well. He appears to be neither the indifferent son of a founder, prematurely placed in a position of responsibility, nor a young man crushed by the weight of a US$9 billion conglomerate. He talks about growing up in a family centered on education, and it sounds genuine.
If Wall Street was at first skeptical of the new generation of Slims, those doubts seem to be vanishing with time. “He is young and dynamic, with two feet on the ground,” says Merrill Lynch analyst Juan Carios Mateos. “He has shown the market his ability to face big challenges like this one.”
What is a Sanborns?
With more than 100 stores throughout Mexico, that is probably a silly question for most Mexicans. However, the restaurantbookshop-handicraft-computer-music-cosmetics-chocolatesbake ry-pharmacy-light appliance model is far from common in the rest of the world.
Marc McCarthy of Bear Stearns says that a duty-free store might be the closest reference for US consumers. However, Slim says that duty-free stores are often places for rush purchases, whereas Sanboms is a “place to be.”
“It’s place for many occasions, and a place to find things you need,” he says. “More than a place to go and shop, eat or have a coffee, it’s a place to go to see books and magazines and maybe buy nothing. It can be a meeting place where you agreed to see your girlfriend, or someone else.”
It is also a retail platform with no direct competition in Mexico. It is that uniquely flexible mix of format that makes it a lasting one, according to Slim. “You’re not limited to a single concept, nor price war,” he says. “[The format is] rather one of an environment for your client.”
COPYRIGHT 2001 Americas Publishing Group
COPYRIGHT 2003 Gale Group