Rethinking Real Estate - trouble at CVS?

For years, real estate has been an important component of my investment thought process. In 2002, we computed that Home Depot's value was exceeded by the value of its well-placed and hard to replace real estate. That value provided a "margin of safety" despite the challenges of competing with Lowe's and the vagaries of retailing.

The dynamics of the internet has changed that anchor value of real estate. My first real exposure to this shift was in the car retailing area. In analyzing AutoNation and Carmax, I discovered that car retailers were discovering that car purchasing was driven by online analysis. Gone were the days of driving from car lot to car lot. Instead, purchasers could simply sit at home and narrow down purchase options. When the search was concluded, a purchaser could drive to a less prominent and much less expensive lot and "kick the tires" there. A huge cost saving to auto retailing expenses. Carvana has highlighted this shift.

The Covid crisis has highlighted many of the same trends in other industries. As we have reviewed the healthcare sector, the low stock prices of pharmacy powerhouses CVS and Walgreens has been astonishing. But closer inspection reveals a retailing approach based on expensive real estate located at critical road junctions. In the past, retail discovery has been partially a drive-by convenience. However, if the new drive-by is a Google search, do these real estate locations continue to hold compelling value? If not, these companies may find it difficult to earn their cost of capital and be distorting their business plans by their long-term lease commitments.

Anti-Trust: Does It Work?

I was recently watching an Amazon Prime program titled "The Men Who Built America." It was well-done by editing out vast amounts of detail while honing a story connecting Vanderbilt, Rockefeller, Carnegie, Morgan, Edison and Tesla.

The most striking takeaway was the dynamic growth of a world without mountains of regulations. I have often wondered if the continuous slowdown in growth is a function of scale - that growth of larger entities simply becomes more difficult. While this may be a factor, there is nothing inherently so. Our slowed growth is likely due to regulatory inhibitions.

The next most striking takeaway was the uselessness of anti-trust. Teddy Roosevelt is featured in the program. In it, his populism is on display as he grabs the narrative of William Jennings Bryan to demonize these wealthy capitalists. Roosevelt focuses on Rockefeller and in 1911 wins a seminal anti-trust case against Standard Oil. 

Rockefeller's company is broken into 34 pieces, in which the parts become much more valuable than the original whole and as a result, Rockefeller goes on to become the wealthiest man in the history of the U.S. My takeaway was that the result of the anti-trust action did not: 1) reduce Rockefeller's wealth or power, 2) result in better outcomes for the consumer or 3) restore power to suppliers. 

Given this poor result, I reflected on anti-trust effectiveness and, on further study, I did not discover a single example of effectiveness. Instead, the competitive dynamics of capitalism serve to create change in 1) who is the wealthiest, 2) better consumer experiences and 3) a new group of suppliers. All anti-trust actions have simply slowed the marketplace in achieving the very things that anti-trust target.