Tuesday, April 18, 2006

Sandy's flawed farewell

Sandy Weill retires from Citicorp today. He leaves with all the trappings of a successful New York business career – over a billion in stock, admired philanthropy, and fawning press -- but the core business concept that drove his career – one-stop shopping for financial services -- is fundamentally flawed.

Weill pioneered the idea that consumers would buy all their financial services – banking, stock brokerage, mutual funds and insurance – from a single provider. To put that idea into practice, he acquired the pieces and put them under the same corporate parent. He did this first by acquiring a string of brokerage firms and merging them with American Express. When it turned out that Weill and Amex CEO James Dixon Robinson, III mixed like chalk and cheese, Weill was tossed out. A down but not out Weill started over again with Commercial Credit, a Baltimore consumer lender, which he used to buy Primerica and Travelers – ultimately merging with Citicorp in a $70B merger.

Weill’s weakness was not in doing the deals but in making the concept of one-stop-shopping work. The problems are legion:

  • Lack of consumer demand. Consumers don’t want one firm to have control of all their financial assets and liabilities – viewing such concentration as unnecessarily risky;
  • Enormous systems challenges. Cross-selling, say, insurance to a banking customer requires systems that keep a single view of all the customer’s relationships with the institution. These systems are hugely expensive and time-consuming to build;
  • Territoriality. Moreover, the banker in charge of that customer fears that the insurance sales person could upset the relationship with that customer – cutting into the banker’s livelihood; and
  • Training. If the institution tries to solve this problem by making one salesperson responsible for all the customer relationships, there’s a huge training cost needed to make that single salesperson knowledgeable in all the products.

And the proof of these flaws is in the pudding. From a stock market and financial perspective, Citigroup has not exactly dominated the dojo. For example,

  • Below average shareholder value. Compared to its peers, Citigroup’s 360% stock price increase over the last decade is below the 390% average of its peers. Lehman Brothers, for example, has seen its stock rise 11-fold during the period. And over the last year, Citigroup’s stock is up just 5% compared to a 34.3% average for its peers;
  • Flat revenue. Over the last five years, Citigroup has increased revenue an anemic 0.8% annual average compared to a 3.9% growth for its peers. Bank of America’s revenues during the period climbed an average 7.8% per year;
  • Below average profit growth. Over the last five years, Citigroup has increased net income a respectable 11% annual average – but this falls short of the 15.4% growth for its peers. Merrill Lynch net income during the period increased an average 24.6% per year; and
  • Below average productivity. Citigroup’s sales per employee were a respectable $857,143 in 2005, which falls short of the $1,081,169 average of its peers. And Citigroup’s performance falls way short of Goldman Sachs’ $2,260,870.

Weill will enjoy a comfortable retirement. However, due to his flawed one-stop-shopping concept, smaller shareholders won’t be able to use Citigroup’s stock to do the same.


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