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Generational Change

This topic comes up quite frequently when we are looking at a firm with a 60s-something founder at the helm and with a daughter/son also in the business. Is the plan to hand over the reins someday? How will the other shareholders react? Is the person worthy? Do they need key-person life insurance?

In a recent speech, Louis Roquet, president and CEO of Desjardins Venture Capital, said that 40% of Quebec’s economy will see ownership change over the next ten years, as 50% of SME firms will face a moment of generational change/sale.

While the knee-jerk reaction of some institutional investors is that the next generation is rarely worthy, I beg to differ. Just think of the legions of Canadian offspring that have done extremely well in business, thank you very much: Duncan Jackman, CEO of E-L Financial; Linda Hasenfratz, CEO at Linamar; Anthony Munk, Onex; Ken Rotman, Co-CEO of Clairvest Group; Nancy Southern, CEO of ATCO; etc.

For all the concern over Galen Weston Jr.’s ascension to the Executive Chair role at Loblaws, I think he’s going to make it work. One has to trust the father and Board of Directors that they really have a handle on his capabilities. Given the incredibly large stake they have invested themselves, you can be assured that the decision was thought through over an extended period of time.

The cuts announced at Loblaws seem meaningful and not the type that’ll hurt we customers. But the RBC equity reseach note out the other morning demonstrates, in part, the latent concern about the changes to the executive suite:

On the road to Simplicity:

• Loblaw’s 3 year renewal plan is focused on “Simplify, Innovate and Grow”, and it would appear that the plan will be executed in that order. We do not believe management is done with simplifying, and we would expect announcements around banner consolidation and supply chain restructuring before shifting focus to innovation and growth.

• Fewer, but more focused, head count: Yesterday’s announcement, in the works since October, applies to 800-1000 positions at head-office and at regional offices, representing 15-20% of current headcount. The objective of the realignment will be centralization and process re-engineering, with back office centralized at head office and regional offices focused on strong operational teams.

• Realignment of this magnitude does not happen quickly or easily. Yesterday’s announcement was consistent with our thesis that Loblaw’s road to recovery will be long and that equity markets are getting ahead of themselves with regard to the recent share price performance, and at current prices we remain cautious with regard to Loblaw.”

For all the concerns about the folks from Arkansas, they’ve had their own problems as well. As for the super stores, I just don’t see it destroying the Loblaws traffic. For starters, the new Loblaw stores are much more enjoyable to visit than the Golden Mile Wal-Mart, for example. And would you drive past an older Loblaws store (Bayview/Leaside, for example) and spend another 25+ minutes round trip to Scarborough to save 20 cents on something? Or $2 for that matter? When gas is $0.80/litre?

It looks as though the team is well on the road to turning the place around, as the stock market has already begun to indicate as L bounces nicely off the 52 week low.


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