In his July 2, 2007 Business Week column "How Citi Fixed its M&A Business" Steve Rosenbush wrote:
"In the fiercely competitive mergers-and-acquisitions field, the world's largest bank has emerged from the ongoing M&A boom stronger than ever. Once in the middle of the bulge bracket, it's now neck and neck with leaders Goldman Sachs Group (GS) and Morgan Stanley (MS) in the race for market share. The M&A unit's share of the global market has grown from 18.9% in 2004 to 27.1% as of mid-June, putting it within one point of its rivals, according to researcher Dealogic. Its compound growth rate of 12.8% over the last three years is the fastest of any major investment bank."
In this article Frank Yeary, head of Citigroup's (NYSE: C) global M&A business was quoted as saying: "One reason we have taken as much share as we have is our ability to commit resources and infrastructure to cross-border deals."
THE MIDDLE LINE
Everyone on the planet follows "The Top Line" and "The Bottom Line" performance of public companies. But do they ever look closely at "The Middle Line?" Rarely. What's the middle line? It's the resources and infrastructure Citigroup brings to the table in cross-border deals ... as well as domestic deals. These resources and infrastructure are the enterprise marketing expenses that support Citigroup’s sales revenue.
Why focus on banks in this look at the middle line? Because their income statements report enterprise marketing expenses in their purest form. Manufacturing companies can easily load overhead expenses into the cost of good sold without anyone noticing. From an intermediation perspective the "cost of goods sold" in banking is interest expense. And banks aren't allowed to load overhead into interest expenses. They also have far less wiggle room in reporting overhead costs as line items in their income statements. All of the data in this post were downloaded from EDGAR Online I*Metrix exactly as reported in company SEC filings.
ADVERTISING AND MARKETING
It's not widely known, but the advertising and marketing expenses of some banks are as big as those of leading consumer product companies. For comparison, Ford Motor Co. spent $2,458 million in 2004 making it 7th on the list of Leading National Advertisers. While Citibank reported spending even more -- $2,577 million -- on "Advertising and marketing expenses" in the four quarters ending March 31, 2007. Note LNA measures only media costs, while the advertising and marketing expenses reported by Citigroup include non-media costs like road shows, marketing research, and ad production. Even so, the traditional marketing expenses of banks pale by comparison with their total enterprise marketing expenses. For the details on measuring these costs see my 12 minute Adobe Connect presentation on "Enterprise Marketing Expenses."
YOU CAN'T SAIL A SHIP FROM THE GALLEY
Marketing is too narrowly defined as "Advertising and marketing expense." These twins are only a small piece of the enterprise marketing challenge. In the case of Citigroup that $2,577 million represented only 1.7% of revenues in the four quarters ended March 30, 2007. To think that revenues are driven by these expenses alone is to loose sight of land. (Click to enlarge the table)
CMOs fail so often because they are charged with sailing a ship from the galley. You've got to be at the helm to address the fundamental enterprise marketing challenge: optimizing the costs of everyone and everything that influence how customers and investors perceive your company. If you aren't you're either drifting aimlessly or on autopilot.
Citigroup's enterprising marketing expenses include $30,713 million in employee compensation and benefits. Every employee is a marketing representative. There is also the $3,855 million spent on technology communications. Every email, customer statement, letter and phone call is a marketing message. And what about the $9,724 million in other operating expenses? Countless marketing expenses large and small are built into this line item, from business cards to building services. This is not to say that advertising and marketing are any less important. Rather, that revenues and stock price are driven by all these expenses. And it is the job of enterprise marketing to determine the impact of them on future market share, revenue, earnings and stock price.
JPM's $820 MILLION PROBLEM
In Who Says Elephants Can't Dance Louis Gerstner introduced a measure he called the cost per dollar (CPD) of revenue. I call it "Gerstner's Rule." It boils down to this – less is more:
... CFO Jerry York and his team determined that IBM's expense to revenue ratio – i.e. how much expense is required to produce $1 of revenue – was wildly out of range with those of our competitors. On average, our competitors were spending 31 cents to produce $1 of revenue, while we were spending 42 cents for the same end. When we multiplied this inefficiency times the total revenue of the company, we discovered that we had a $7 billion expense problem! (pages 62-63).
How did Mr. Gerstner measure competitors' spending? It appears he used the line item in their income statements called "Selling, General and Administrative" expenses to calculate the cost per dollar. For the details see my 17 minute presentation "The Battle for Your Desktop."
In the following chart I use the enterprise marketing expenses for Citigroup and its major competitors to calculate their cost per dollar of revenue. The left-hand x-axis shows the ten most recent reporting periods beginning with February 28, 2005 and ending with May 31, 2007. The right-hand x-axis lists the five companies by their ticker symbols: Morgan Stanley (NYSE:MS); JPMorgan Chase Co (NYSE: JPM); Citigroup Inc. (NYSE: C); Goldman Sachs Group (NYSE: GS) and Merrill Lynch & Co. Inc. (NYSE: MER). The enterprise marketing cost per dollar of total revenue (including interest income) is on the Y-axis. (Click to enlarge the chart)
Even if you work for one of these banks, some of the results probably will come as a surprise. For example, if you work for MS you probably didn't know the company's cost per dollar dropped systematically over the ten quarters. In F-05 it cost you $0.63 to generate $1.00 in revenues. By the close of business in May 2007 it cost you just $0.26. JPM posted a $0.32 cost per dollar in March 2007. The 6 cents difference between MS and JPM doesn't seem like a heck of a lot. Until you multiply it by the $13.7 billion difference in their last four quarter revenue and discover that 6 cents becomes an $820 million enterprise marketing problem for JPM.
Then you see Citigroup with the lowest CPD in both periods. Are there enterprise marketing scale efficiencies involved here? There may be, considering the company has 1,400 branches and 3,800 ATMs in 46 countries around the world.
Both Goldman and Merrill CPD schedules look a bit like roller coasters. In both November of 2005 and 2006 Goldman actually posted two of the lowest CPDs of all five companies in all ten quarters: in those two periods it cost GS just $0.24 and $0.18 respectively to generate $1.00 in revenues. Looks like seasonal lows in spending. Merrill's CPD schedule is similar to Goldman's, except it cost the company more in every period except F-07.
BEING GOOD AT THE WRONG THING
Market share is the most widely used marketing metric in the world. But it's most often used in the wrong way … only at the segment and not the enterprise level, as hindsight instead of foresight and as a goal rather than a variable. Being good at the wrong thing isn't good at all. Market share should be:
1. Measured at the enterprise and the segment level
2. Used to assess product/stock market interactions
3. A variable in marketing efficiency and risk
4. Used to peer into the future, not report on the past
5. The pivotal point in earnings maximization
6. Used to drive future company sales revenues
7. A variable in forecasting competitive stock price.
ENTERPRISE MARKET SHARES
Let's take the first step in this journey and jump to the enterprise level so we can track each company's share of total revenues. In this chart I've arranged the companies from lowest to highest enterprise market share. Total revenues in the strategic group, including interest income, in the last quarter were $142.1 billion. Over the last four quarters, group revenues were nearly $500 billion. (Click to enlarge the chart)
Here are the two important things to take-away from this chart. First, the three smallest firms increased their shares (in green) over the ten quarters:
MER went from 10.44 to 15.12 percent,
increasing share by 468 basis points;
GS rose from 13.27 to 14.32 percent,
increasing share by 105 basis points; and
MS from 15.44 to 19.52 points,
increasing share by 408 basis points.
Second, most of the 981 basis points that these three players carved out of the market came from Citigroup. The other 12 were dropped by JPM.
CITIGROUP REVENUE LOSS
The Citi's decline in market share reflects a loss of $13 billion in revenues, with an accompanying increase in enterprise marketing expenses. Steve Rosenbush concluded his article by saying:
"Citi's lack of proprietary trading may have hurt in recent times, along with a flat share price and a 300,000-plus-member workforce that many analysts consider bloated. CEO Chuck Prince has sought to trim costs, only to minimal effect. …
But when it comes to the M&A trade, Citi’s financial supermarket approach is confronting the white-shoe rivals squarely—and winning."
What impact will all this have on the future of Citigroup? In forthcoming posts I'll follow the remaining six steps along the path to understanding Citi's competition for customers and capital. Stay tuned. And please feel free to contribute your thoughts.