TUI - severe management mistakes

If one wonders about the poor performance of the former German conglomerate Preussag now named TUI AG the reasons seem clear.

Condensed to one word, the company suffers under severe mismanagement.


Clearly visible in the development of TUI's stock price the decisions of the past have left their mark.
One example of this fatal decisions is the acquisition of the Canadian shipping line CP Ships in August 2005.

For a record price of 1.7 billion Euro, TUI's CEO Michael Frenzel paid 60% more per TEU than Maersk Sealand for P&O Nedlloyd in the same year.

But in contrast to Maersk Sealand TUI didn't neither have a focus on container shipping nor the necessary reserves to weather a industry downturn.
Since the container shipping industry experienced a severe retreat from the frenzy in late 2005 the acquisition remains under fire.

So Mr. Frenzel "Daddy Deal" took measures to protect his employment. To make sure that the drag from the container shipping segment within TUI remains manageable he merged the tourist segment with the British company First Choice.
This way he has created himself a currency for further deals yet to come as he is able to sell shares of the newly created TUI Travel PLC.

Meanwhile the valuation of the German parent TUI AG seems stretched. With a stake of 40-45% (ca. 1.7 bn Euro) of TUI Travel PLC remaining, the current stock price puts the value of the Hapag-Lloyd subsidiary at about 2 billion Euro.
Very lofty for a shipping line with about 6 billion Euro revenue that is currently amassing losses.

With the US economy in free fall and major Asian economies like the bellwether Singapore sharply weakening the prospects for global trade look gloomy.
Adding to this a flood of brand-new container ships is circulating in the industry, always seeking capacity to fill.

This will inevitably lead to falling freight rates. And the longer the current economic weakness around the world persists the more pressure will build up at weak companies like Hapag-Lloyd and his parent TUI.

The end of the story could be that - as history has proved so often - such players are wiped out exactly at the turning point of the cycle.

So far, we are nowhere near the bottom.

Fuchs - total domination of the German spice market

If one wonders about the high prices for spices in some German supermarkets: it's because the consumer pays monopoly prices.

Since many years one big player dominates a market with initially only a few visible entry barriers: FUCHS Gewürze GmbH.
According to a paper from the German antitrust agency, FUCHS, second only after McCormick & Co, in fact holds 60-80% of the German market for spices.
This after the company was allowed to buy its biggest competitor in October 2000.

Competition is weak and diverse with no one holding more than a single digit percentage of the market and most companies only achieving one-tenth of a percent market share.

But how is this possible?
According to the German antitrust agency FUCHS controls the most important distribution channels. By signing exclusive supply contracts with almost every German supermarket chain, FUCHS makes sure that no competitor is able to sell his spices in bigger volumes. These contracts often contain payments from FUCHS to the supermarkets, averaging 2.500 Euros per store.

The business practice is profitable for both. The supermarkets get an extremely high return from every sold unit, usually 50%. FUCHS achieves record margins and doesn't have to invest in his brand since it is omnipresent.

FUCHS was also able to take out the competition by buying them. German antitrust laws dind't apply because a revenue criteria wasn't met. The company also has signed "peace contracts" with it's biggest competitors only attacking selectively and regionally.

This continuing practices allow FUCHS to charge the maximum willigness to pay from every customer and also highlights one major weakness of German antitrust laws: The barrier of 500 million Euros regarding the combined revenue.

This revenue barrier also means a potentially successful business model for private equity companies, simply by combining all major players in a small- or midsized market and then charging monopoly prices.

CAGR of FUCHS from 1997-2002 : ca. 15%