Most of Minnesota’s big companies fared well in 2013, but a few big retailers had really tough years — and it shows.
Despite resolute stirrings of an economic recovery, Minnesota’s marquee retail companies remain stuck, putting a damper on the overall financial achievements of the state’s top public companies in the Star Tribune 100.
“This wasn’t a good time to be a retailer,” said Tom Stinson, the former state economist who now is an economics professor at the University of Minnesota. “That’s the underlying story.”
Sales rose less than 1 percent collectively at Minnesota’s 100 largest publicly traded firms, while profits and employment both fell.
Much of the drag came from grocery giant Supervalu and mass merchandizers Best Buy and Target. Those firms, in various stages of retrenchment, recorded some of the largest net revenue declines among the field.
But offsetting the retail woes were mega-gains from a handful of the state’s biggest companies: UnitedHealth Group, 3M, Medtronic, and U.S. Bancorp. Those four led a baker’s dozen companies in the Star Tribune 100 whose market values grew by at least $1 billion.
The dichotomy seems to be driven by a downshifting in consumer spending, still lingering after the global financial crisis of 2008-09. Retailers lost their luster during the Great Recession as consumers slashed discretionary spending. Many Americans still are spooked.
Minnesota’s best-known stores, Target and Best Buy, have been slower to recover than luxury brands such as Nordstrom, or discount warehouses such as Costco.
“The middle really hasn’t been the place to be,” Stinson said. “Things have gotten better, but you don’t feel like going out and buying more consumer electronics.”
Richfield-based Best Buy exited Europe in 2013 and shed its stake in Carphone Warehouse as it tries to simplify its business model to battle competition from Amazon.com and Wal-Mart.
Target, the nation’s No. 2 discount chain, has yet to see its expansion into Canada pay off, where it lost nearly $1 billion in its first full year there and on Tuesday axed the executive in charge. The Minneapolis-based retailer lost $7 billion in market value this year, the worst performance of any Minnesota company. (Market value, also called market capitalization, is a company’s share price multiplied by the number of shares.)
A data breach that contributed to the ousting of CEO Gregg Steinhafel in early May has only compounded Target’s struggles.
Supervalu, meanwhile, sold off its four biggest grocery chains last year, which included 877 stores. The $3.3 billion deal with a private investment firm, Cerberus Capital Management, capped an ill-fated expansion gamble nearly a decade ago when Supervalu bought the Albertsons chain. Wall Street cheered the divestiture, which essentially cut Supervalu in half — shedding 90,000 jobs and slashing revenue by $17.7 billion, the steepest drop in sales of any Star Tribune 100 company.
The results reflect the health of Minnesota-based companies, not the local economy. The job numbers, for example, are for each company’s total employment — not just its Minnesota jobs. But because the corporate giants hire local companies to support their operations — such as printers, advertising firms, truckers and packagers — the state’s economic health is intertwined with theirs.
The stresses in the retail sector were offset by Minnesota’s diverse mix of companies operating in finance, manufacturing, health care and energy.
But the winners and losers are becoming more clearly delineated, analysts say. While many of the firms operate worldwide, companies involved in manufacturing and in the health and medical fields added the most jobs, about 35,000 in all. But those gains were eclipsed by the loss of employment by Minnesota companies in the retail and service sector, whose ranks shrank by more than 100,000.
“What I see here is an interesting trend,” said Louis Johnston, an economist at the College of St. Benedict and St. John’s University. “Companies that are business-to-business are doing very well. But anyone who deals with consumers is in trouble.”
That thread runs across the vital financial signs of the Star Tribune 100, Johnston notes. Trucking giant C.H. Robinson Worldwide, which serves many of the nation’s retailers with its supply chain fulfillment services, was one of the top losers of market capitalization this year, along with Target and Tile Shop Holdings.
But several Minnesota consumer products companies are holding their own, including Polaris, which has substantial government contracts and effectively managed the supply of its rugged recreational vehicles through the economic downturn. Food companies, including General Mills and Hormel, also are showing strength, but Johnston notes that they have a mix of wholesale and retail.
“If you’re doing intermediate goods production, that’s where the action is,” he said. “The only spot that’s cursed is those dealing directly with households.”
Myles Shaver, who teaches strategic management and entrepreneurship at the University of Minnesota, noted that most of the movement of jobs and sales among Star Tribune 100 companies stemmed from mergers, acquisitions and sell-offs.
UnitedHealth Group picked up Brazil’s largest insurer and hospital company for $4.9 billion during the year. The purchase explains why the Minnetonka-based company, the nation’s largest insurance company and Minnesota’s largest firm by revenue, added 23,000 jobs during the year, accounting for nearly half of the total of all Star Tribune 100 firms.
Ecolab and Pentair also have been on buying sprees. Pentair, the water filtration manufacturer, completed a $4.9 billion deal for Tyco’s flow service unit in September 2012. Ecolab, which specializes in water treatment, sanitation and chemical services for the hospitality industry, in March completed its third acquisition in 16 months.
The moves boosted Ecolab’s market value by $7.5 billion, and Pentair’s by $3.8 billion. Those two companies also had the largest net profit gains during the year.
Still, the struggle in the retail space “is really swinging things,” Shaver said, though that’s to be expected as the companies slim down, refocus and attempt to turn around their fortunes.
“If one wants to put a little optimistic spin on it … if you look at the market valuations of Best Buy and Supervalu, they’ve stabilized or recovered over the year,” Shaver said. “So it’s not like they’re in a free-fall. These were big moves they had to make that might be paying off.”
But that old catch phrase about a “new normal” remains on the minds of economists. Consumers’ free-spending days have yet to return, and an aging population isn’t inclined to shop for the high-margin household goods that drive retailers’ bottom lines. Meanwhile the younger generation is putting off homeownership, marriage and starting a family.
The demographic shifts suggest that trends in consumer spending, which powers nearly three-quarters of the U.S. economy, are bigger than the recent economic downturn. And potentially longer-lasting.
“So, is this going to ripple down or is this a fundamental shift?”, asked Johnston. “Is the amount of production going to consumers actually going to fall? There’s nothing wrong with that, but it would be a reversal of about a 70-year trend.”
Jackie Crosby • 612-673-7335