Q ratio Analysis for Global Powers

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For the last six years, this report has included an analysis of the Q ratio of publicly traded retailers on our Top 250 list. The most notable aspect of this year’s Q ratio analysis is the impressive position of retailers based in emerging markets.

The emerging market retailers on our list have always had a composite ratio higher than the average of all companies on the list, but this year those ratios are far higher than ever. Moreover, of the top 30 companies ranked by Q ratio, 11 hail from emerging markets.Before revealing further results of our analysis, it is worth taking a moment to understand what it is all about.

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What is the Q ratio -- and why do we care?
In the current and anticipated business environment, the world’s leading retailers will face intense competition, slow growth in major developed markets, rising input prices (yet with consumer resistance to higher retail prices) and excess retail capacity in many developed markets. All of this implies that, in order for retailers to succeed, they will have to find ways to distinguish themselves from competitors. That means having strong brand identity, offering consumers a superior shopping experience and being clearly differentiated from competitors. The latter can entail unique merchandise offerings, including private brands, store formats and designs and unusual customer experiences.

The goal is to have a sufficiently unique position in the market to generate pricing power and, consequently, strong profitability. If a publicly traded retailer has these characteristics, the financial markets are likely to reward it. That is where the Q ratio comes in.

The Q ratio is the ratio of a publicly traded company’s market capitalization to the value of its tangible assets. If this ratio is greater than 1, it means that financial market participants believe that part of a company’s value comes from its non-tangible assets. These can include such things as brand equity, differentiation, innovation, customer experience, market dominance, customer loyalty and skillful execution. The higher the Q ratio, the more a company’s value stems from such non-tangibles. A Q ratio of less than 1, on the other hand, indicates failure to generate value on the basis of non-tangible assets. It indicates that the financial markets view a retailer’s strategy as unable to generate a sufficient return on physical assets -- indeed, it suggests an arbitrage opportunity. That is, if a company’s Q ratio is less than 1, it could be ripe for purchase through equity markets, and the tangible assets could then be sold at a profit.

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Which companies have high Qs?
This year we analyzed the financial results of 144 publicly traded companies on our list of the top 250 retailers in the world. The composite Q ratio for all companies was 1.144. This was a slight improvement from 2010 (1.03) and far better than the 0.75 recorded in 2009, a miserable year for the economy and retailing. The improvement reflects the rise of equity prices during the past two years, yet this year’s composite Q remains far below the 1.57 recorded in 2008, just before the start of the global economic crisis.

The company with the highest Q ratio was Hennes & Mauritz, the Swedish apparel specialty retailer. This was no surprise, as H&M has been at or near the top since the list began. Yet the second company on the list this year was BIM, the Turkish hard discount retailer. This was the first time that an emerging market retailer was No. 2 on the list.

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Highlights
As mentioned, emerging market retailers did particularly well this year, earning a composite Q ratio of 1.932.This compared quite favorably with U.S.-based retailers (1.406) and especially well when compared with Western European retailers (0.99).Among countries with three or more retailers on the list, South Africa performed best; its five retailers had a composite Q ratio of 2.931.

Emerging market retailers have always done well on this list. That reflects the fact that, if an emerging market retailer makes the Top 250 list, it is probably a very large player within its home market. Therefore, it is probably doing something right in order to become so large. Yet this year the Q ration for emerging retailers rose dramatically. This probably reflects increasing investor confidence in emerging markets, as well as confidence in the ability of homegrown retailers in these markets to compete favorable with global players. This suggests that such retailers may someday be global players in their own right.