To: St Nicholas Enterprises
From: Counting House Capital
Dear Santa Claus,
I am an activist investor in your company who has been infuriated for many years by your wilfully eccentric approach to capital allocation, pricing, brand strategy and supply chain management. Some of your devotees have urged me not to criticise your strategy in the season of goodwill, to which I reply: “Bah, humbug!”
I have always regarded your recourse to fourth century philanthropy and wasteful use of working capital as characteristic of an entrenched founder whose energy has been devoted to delighting underage customers at great expense while ignoring all management discipline. You have displayed little interest in covering your cost of capital, let alone exceeding it.
Life at St Nicholas is one long party. Free food for your elves, who receive generous compensation to make bespoke, non-standardised products. Presents offered to anyone who writes you a begging letter and has been “good” according to some vague metric. Jingle bells, rides in one-horse open sleighs, eggnog cocktails: Oh, what fun you have with my money.
Your entire enterprise exists to supply presents one day a year, yet everyone is on the payroll for 365 days. You will not even extend your franchise to Black Friday, which is a blatant missed opportunity. Meanwhile, you insist on delivering down chimneys, ignoring the fact that only one segment of your target demographic lives in a house. What is wrong with doors?
In short, St Nicholas is one of the least innovative companies I have ever encountered. It is as fat and happy as its chief executive, sticking religiously to an ageing business formula that exposes it to being disrupted. I know of several technology start-ups that are raising capital to create applications on which children could bid for presents that would be made by contract artisans and delivered by unicorns.Given your lack of research and development, I have consistently argued that any surplus capital should be returned to shareholders as one-off tax-efficient distribution close to the year end — on December 25, for example. You have ignored my requests, choosing to brighten up children’s lives at random, rather than rewarding investors whose interests are aligned.
Since you are too busy to engage in constructive dialogue, I held discussions this year with other hedge funds. We devised a plan for a merger of your business with related companies, followed by a series of spin-offs and initial public offerings to create more focused corporations. The structure was approved by several investment banks and law firms that are paid by the deal.
By combining St Nicholas, Walmart, Macy’s, WPP and Federal Express, and then splitting them up, we would create a set of vertical businesses in the gift making, fulfilment, merchandising and events spaces. They could license the Father Christmas brand and be incorporated in Lapland for tax purposes.
Recently, however, I was visited at home by three ghostly analysts, bearing fundamental research into your business. They warned me that, although I base my investment model on dividends flowing into my counting house over three to five years, the intrinsic value of St Nicholas can only be grasped on a panoramic view of the past, present and yet-to-come.
Santa, I have listened to many conference calls and seen many presentations, but none has struck me with the force of these insights. It is not an exaggeration to say that I have undergone a complete conversion in my view of St Nicholas. Warren Buffett advises investors to seek exceptional managers and I now see that few achieve your longevity.
You embodied the new economy before the idea had been conceived. St Nicholas is a global business, receiving signals from far corners of the earth and delivering packets over an integrated network. It works at super-high speed, faster than broadband in South Korea, and knows no boundaries. The internet is antique by comparison.
Your lack of interest in profitability struck the traditionalist in me as foolish but I have come to understand the virtues of reinvesting revenues over several centuries in order to dominate your market and entrench your monopoly.
Jeff Bezos, your closest logistics competitor, has copied your tactics but, although Amazon crushes small shops, department stores and big box retailers, it cannot topple you.
This has helped you to build the biggest social network in the world, putting Facebook to shame. Everyone includes your messages in cards and parents pretend the gifts they buy for their children come from you — you outsource many deliveries at zero cost. By combining a jolly presence with sophisticated viral marketing, you have expanded your reach everywhere.
Since these revelations, there has been a spring in my step. Coca-Cola once used your image in advertising, prompting rumours that it had invented Father Christmas, but it has nothing to teach you about branding and consumer appeal. My investment in St Nicholas has even greater potential than Mr Buffett’s stake in Coke, and I intend to hold it in my portfolio indefinitely.
It used to be cold, bleak, biting weather outside, but now it feels quite warm for the time of year.
Merry Christmas to one and all,
Ebenezer Scrooge
* * *
Originally posted at The FT