Westfield Group Strategic Analysis: Strengths and Growth Options

Introduction and Company Background

The Westfield Group is one of the world's largest developers and managers of retail property, operating 119 shopping malls across Australia, the United States, New Zealand, and the United Kingdom. The group is financially solid and has a strong, experienced management team. It has leveraged these strengths in part by sticking to its core business, resulting in a finely tuned organization — but one that lacks diversification.

Westfield is liquid but has seen a decrease in revenues and profits over the past couple of years, in part due to economic slowdown. The firm is partly insulated from this by virtue of its strength in the Australian market, but its lack of diversification continues to put it at risk. The firm's tactics and objectives appear to be relatively congruous. However, despite placing an emphasis on the development of human resources, the company is essentially family-run, which can be a deterrent to top talent. Also, despite the importance of the U.S. market to Westfield, only one American sits on their Board, indicating a gap in U.S. market knowledge at the highest level of the company.

Despite the global economic slowdown, Westfield has several opportunities for growth. However, the company's risk aversion means that moving aggressively into the Asia-Pacific market, or expanding rapidly in the U.S. and UK via acquisition, would require a significant leap of faith. More likely, the best option for the firm — given its internal capabilities — is to stay the course. This will help it weather the current economic storm and allow it to retool over the next couple of years to better take advantage of opportunities when the global economy recovers.

The Westfield Property Group is one of the world's largest retail property management firms. The company's primary business is the operation of shopping malls. The Sydney-based company is listed on the Australian Stock Exchange and has a market capitalization of AU$25 billion. The company operates a total of 119 shopping centers in Australia, New Zealand, the United Kingdom, and the United States, managing a portfolio of over 10 million square meters of retail space worth $63 billion. In 2007, Westfield turned a profit of $3.4 billion on revenues of $5.9 billion.

The Westfield Group began in 1956 when two immigrants, John Saunders and Frank Lowy, established a retail development in the Sydney suburb of Blacktown. The two had previously operated a delicatessen, a coffee lounge, and a small property venture, but recognized the potential of a larger-scale retail operation in the area. At the time, shopping malls were unknown in Australia. The trend was nascent in the United States, and the first two shopping centers arrived in Australia in 1957. In July 1959, the first Westfield shopping center opened in Blacktown. Within weeks of opening, offers for partnerships and joint ventures came pouring in. The partners accepted some of these offers and began developing multiple properties in the Sydney area. By 1960, the duo had taken Westfield Properties public.

From that point, the company experienced slow but steady growth, opening properties in major cities and suburbs across Australia. Their first major overseas move came in 1977, when they opened a mall in Connecticut. The company experienced strong U.S. growth in the 1980s. The 1990s saw further expansion to New Zealand and the United Kingdom, and the company began to take the form it holds today. Westfield bought into the Mall at the World Trade Center in 2001, only a few weeks before the terrorist attacks, eventually sold its interest a couple of years later, and then re-entered the project in 2008. A wide variety of transactions over the following years significantly increased the size of Westfield's real estate portfolio. In 2004, the current incarnation of the Westfield Group was formed when subsidiaries Westfield Holdings, Westfield Trust, and Westfield America were merged into a single group.

Currently, Westfield's 119 properties are divided as follows: 55 in the United States (5.8 million square meters), 44 in Australia (3.5 million square meters), 12 in New Zealand (0.4 million square meters), and 8 in the United Kingdom (0.4 million square meters). These properties contain a total of 22,763 retail outlets and are worth a combined A$62.2 billion. The company is the largest retail property manager in the world by market capitalization. Competitors include British Land in the UK and Centro in Australia. In the United States, competitors include Simon Property Group, General Growth Properties, Vornado Realty, and Macerich.

As a vertically integrated company, Westfield has three main business activities, all pertaining to its shopping centers. The first is Property Management, which comprises mainly the marketing and leasing of retail space. Key elements include the retailer mix, creating a positive shopping experience, and fostering an environment that encourages spending. This part of the business drives most year-over-year revenues, and the key measure is same-property sales — the incremental growth in sales from the same property one year to the next.

The second main business activity is Property Development. This involves the design and development of new shopping centers, including the arrangement of construction and leasing of key anchor stores. Anchor tenants are addressed in this activity because their presence mitigates the risk inherent in new construction; construction does not commence until anchor tenants are in place. Key anchor tenants used by Westfield include Wal-Mart, JC Penney, Coles, Woolworths, and cinema operators.

The third main business activity is Fund and Asset Management. Westfield has expanded its activities to provide asset management services to institutional investors and other investors of equivalent size and sophistication. Some of these investments are undertaken as joint ventures with other large investment firms or in limited partnership arrangements.

Internal Environment: Strengths and Weaknesses

Westfield's organizational structure is broken down geographically, with one main Global unit and four regional units. This structure supports the company well because Westfield operates primarily in one business line, and each geographical unit can better address issues pertaining to its respective nation. The senior executive team is experienced, with an average age of 49 years and an average tenure with Westfield of 13 years.

The Board of Directors for the Westfield Property Group is headed by Chairman Frank P. Lowy, one of the two founders of the company. Three of his sons also sit on the Board, including the two Group Managing Directors, Steven Lowy and Peter Lowy. In total, the Board includes four executives (three of them Lowys) and nine non-executives. Ten Board members are from Australia, two from the United Kingdom, and one from the United States. The experience of Board members reflects the disciplines important in the property management business: five come from a law background, five from a finance or economics background, two are Lowy family members with a real estate background, and one has a different background.

In 2007, the Westfield Group saw a significant reduction in revenues and profits. The cost of revenue continued to increase even as revenues decreased. The Group has continued to invest in growth despite the challenging environment. In 2008, conditions became even more difficult, both in terms of slumping consumer demand due to weakened global economies and a credit crunch that limited investment opportunities and the willingness of retailers to expand.

The company lacks a strong sense of mission or vision. As outlined on their website, the mission is "to deliver investors steady returns and solid long-term capital growth…within a framework that attempts to balance economic, social and environmental issues." These are, of course, the basic strategic objectives of any corporation, as described by Milton Friedman. It can be inferred from this not that the company has no clear vision, but that the vision is essentially a larger version of the current company. Westfield appears to have placed some priority on developing community, social, and environmental aspects of its operations, but these remain ancillary to the core strategy of developing and operating shopping centers. Ideally, the company would have greater clarity regarding market share, revenues, market position, and other broad variables. Without such clarity, the company has a sense of direction but no particular focus.

The Westfield Group is well-positioned as one of the only international retail property management firms. It has considerable room for growth and a strong track record of generating positive returns for shareholders. The company is well-insulated against economic fluctuations because of the structure of its leases, and it continues to develop new projects, including two new projects in Sydney and a new shopping center in London.

The Westfield Group's success is predicated on several key strengths. One of the most important is its human resources program. Because knowledge is a critical competitive driver in the industry, Westfield has made the development of knowledge, information, and wisdom a cornerstone of its strategy. The company not only strives to identify, attract, and hire the best talent, but it also has extensive programs to develop that talent over time, including a detailed training program. The firm believes that wisdom derives from experience and therefore seeks executives with significant work experience and long company tenure. Supporting this human resources strategy are tactics of open communication, diversity, and the free flow of ideas at the managerial and executive levels.

Another key strength is the company's high occupancy rates and long-term leases, which help it weather economic downturns. For example, the current weakness in the U.S. market has not affected Westfield significantly because its properties maintain a high occupancy rate of 97.3%. Customers are generally locked into long-term leases, ranging from 5–7 years in Australia to 10–15 years in the United Kingdom. This provides stable cash flows that insulate the company from the economic shocks to which it would otherwise be exposed, given its dependence on the retail sector.

A third strength is vertical integration. Since their very first property in Blacktown, Westfield has undertaken the design, construction, and operation of their properties themselves. This high degree of control allows the company to stay at the cutting edge of developments in the mall industry. It also enables more effective risk management — for example, by establishing anchor tenants before beginning construction. As a result of vertical integration, Westfield is able to consistently complete projects on time and on budget, representing a significant source of competitive advantage.

Lastly, Westfield derives strength from its capital management. As of the end of 2007, the company held $7.7 billion in liquidity, which it uses to invest in new property developments and on the open market. This allows the company to engage in income hedging to protect against foreign exchange fluctuations. The group's expertise in capital management has allowed that function to become a third pillar of its business.

Westfield has relatively few weaknesses, but those that exist are significant. The first is its lack of diversification. Although the company is invested in four countries, 92% of its capacity is located in either the United States or Australia. This concentration is not unusual in the industry, but it does increase operational risk. While weakness in the UK and U.S. markets has so far been offset by strength in Australia, two markets are insufficient to provide strong insulation against fluctuations. Furthermore, the Australian market is becoming saturated, which limits Westfield's ability to grow its business domestically.

A second weakness is found in the composition of the Board of Directors. Although key functional skills are well-represented, geographic representation is poor. Despite the fact that over 50% of the company's capacity is located in the United States, only one of thirteen Board members is American, while ten are Australian. This does not accurately reflect the importance of the U.S. market to the company's success and means that Westfield lacks adequate oversight of American operations from directors with sound knowledge of that market.

Financial Performance

A third weakness is the company's limited innovation potential. There is little room for upward mobility within the organization, with top positions occupied by sons of co-founder Frank Lowy. This can hinder the attraction of top talent, as high-caliber candidates will recognize that career advancement is limited. While Westfield appears to provide strong opportunities to learn the retail property management business, the long-term human resources approach — combined with family control of the top positions — would appear to stifle innovation. The industry is not especially dynamic, but should market forces shift dramatically or accelerate rapidly, the firm could be exposed precisely because of this lack of dynamism.

Westfield is a financially solid company. Its income statement shows a decrease in revenue of 27.5% over the past year, driven mainly by a decline in property revaluation revenue. Core property revenue also declined by 6.3%. Although the company cut expenses slightly (by 1.3%), the bulk of these cuts were in financing costs rather than operating costs. As a result, profits declined 38.6% over the year.

The reduction in financing costs reflects a reduction in debt at Westfield. The company was also able to increase assets, the result of both new project completions and an increase in the value of existing assets year-over-year. These changes improved the debt ratio to 45.6% from 52.0% and the debt-to-equity ratio to 84.1% from 108.4% — both improvements from the figures recorded when the current incarnation of the company was formed in 2004.

In the most recent period, the balance sheet has maintained this structure, with the debt ratio increasing slightly to 45.8%. Revenue and net income for the first half of the current year were down significantly relative to any six-month period since the 2004 reorganization. However, the company has recently affirmed its guidance, signaling that despite the slowdown, recent performance is broadly in line with expectations.