Kim Parlee: Well tonight on Stars and Dogs we’re going to explore an age old question: Is bigger better? Our next guest says: Yes, if a company stays focused. For more, we’re joined now by Rick Wolfe. He’s President of PostStone Corporation. He selected Tesco as a star and Citigroup as a dog. And welcome to the show.

Rick Wolfe: Thanks very much, it’s good to be here.

KP: You, as I alluded to when I threw to break, called Tesco a hedgehog.

RW: That’s right.

KP: Is that a good thing?

RW: Well, according to Jim Collins in his wonderful book Good to Great: Why Some Companies Make the Leap... and Others Don't, a hedgehog is a very good thing.

KP: Why?

RW: A hedgehog, the old story goes, is a creature that has only one idea, but it is a very big idea. You contrast this with the fox which has lots and lots of ideas. And we’ll get back to foxes later. Tesco is a company that has grown around the world. It absolutely dominates the U.K. grocery market and in fact the U.K. overall with one in eight retail dollars. And it does this with an obsessive focus on the customer.

KP: So just focus. The hedgehog in your eyes is a stock that knows what they do best and just does it.

RW: That’s right. And it boils it down into the simplest ideas. Their tagline, “Every little helps” is a tagline designed to be meaningful to employees, to be meaningful to investors, to be meaningful to suppliers and most particularly, customers. Tesco has done something that no other company has done in the history of retailing. They sell right across the British population in equal portion. So, they have their fair share of low income Britons, they have their fair share of middle income Britons, they have their fair share of upper income Britons. It’s not supposed to be possible.

Andy Bell: With the same stores? Do they have multiple brands like Loblaws?

RW: Interestingly no. In fact, if they’ve made any strategic mistake, that’s it. Because their competitors are saying, “No fair, they’re too strong” … with their 30 per cent share of the grocery market. Loblaws has a 40 per cent share of the grocery market.

AB: Yeah, they are up against some pretty tough competitors, notably Wal-Mart who owns the Asda chain.

RW: Indeed, Asda would be number two in the U.K. and Tesco is gaining share on Asda, yes.

AB: How has Wal-Mart failed to dominate the British grocery market? I mean culturally Britain is not that different from the United States.

RW: My take is that Tesco has out Wal-Marted Wal-Mart. So, they have always done wonderful things with data. Wal-Mart has those famous terabyte sized computers in Bentonville, Arkansas that they use to capture cash register data and analyze it. Tesco has gone one step further using their Clubcard program. They associate that data with an individual customer. They send 80,000 distinct offers out a month.

KP: Distinct, meaning every customer is getting something customized to them?

RW: 80,000 different ones every month.

KP: That’s impressive.

RW: And the results – typically a coupon program gets a one to two per cent response rate. Tesco’s coupon programs get a 20 per cent response rate.

AB: So they’ve managed to beat Sainsbury’s and Marks and Spencer. I mean a lot of very competent retailers there in Britain.

RW: With the result that everybody else has to pull up their socks. The standard of retailing in the U.K. today is outstanding, largely because of Tesco – a company that came out of nowhere. They were well behind their peers as recently as 12 years ago.

AB: Is it all for Tesco to lose, though? I mean even a couple of years ago people thought Loblaw was indestructible. Could their competitors not come back at them and learn from what they’ve done?

RW: You have to answer yes to that question. And these changes tend to sneak up on you; but so far there are no indications. And I shop the U.K. stores. They are great stores but you’re not walking in and seeing anything that you see as a market share shifter.

KP: I’d like to talk about price and see how much of this is priced into the stock right now. It’s a London traded stock. I know there is an ADR in the US. Where is it now? Where do you see it going? How much of this good news is already built into the stock?

RW: I think that today’s good news is all built into the stock. But now let’s look at tomorrow. There are other things that Tesco has done which are quite extraordinary. And there are other things they intend to do, which, if they succeed, will keep the stock going up. Growing internationally is very difficult for retailers, as you suggested, Andy, about Wal-Mart. Tesco has been very surefooted across Europe, in Asia and now they are looking at North America. So, expect more growth from them, particularly in their Asian markets and in their Eastern European markets. They are opening in California next year. No one is expecting that to be a tiny, little quiet opening. They’re expecting that to be big. They have very cleverly chosen the state where Wal-Mart is weakest, California. They have very cleverly chosen a format where no one is strong in the U.S., which is the convenience store format. This is a supermarket, in fact a supercentre retailer that has also mastered the convenience store. Furthermore, they have done a year of testing of their convenience store format for the U.S., to customize it for the U.S. consumer.

KP: OK, let’s ask about your dog, it’s Citigroup. And it’s not the hedgehog, it’s the fox.

RW: It’s the fox. Citigroup under Sandy Weill bought every tarnished bauble it could find. It paid very low multiples. It bought businesses all over everywhere. Today, it can’t put them together. Furthermore, it’s running into all kinds of conflicts of interest. The Japanese forced them to exit the private banking business in Japan. In the U.S., the SEC put a prohibition on acquisitions for a while. They had a bond trading scandal in Europe. They’ve sold their insurance business which was the foundation of Sandy Weill’s empire at Travelers. They had to sell that. The speculation is they just couldn’t figure out how to manage the conflicts. Wonderful business people; leading market share in a business here, business there; very powerful brand; the whole thing is just not fitting together.

AB: No synergies after that huge acquisition binge. It’s such a huge company, a quarter of a trillion dollar market cap.

RW: Well, that’s right. And depending on what you’re measuring it’s either the first or second largest financial services firm in the world. It is present in more countries than almost any other financial services firm. It dominates nowhere. It is about the sixth largest retail bank in the States. In no one state does it dominate retail banking. The whole thing just isn’t fitting together.

KP: Well, thanks so much. That’s Rick Wolfe, President of PostStone Corporation.