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.

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.