He's been a paratrooper, a management consultant, the founder of a big-box bookstore chain, and the chief executive officer of a U.S. auto parts retailer. Now former Chapters boss Larry Stevenson is making the leap into private equity.
Fresh from a tumultuous three years in Philadelphia running the Pep Boys auto parts chain, the 50-year-old Mr. Stevenson is back in Toronto. He has joined Callisto Capital LP, a mid-market private equity firm whose team includes some old consulting colleagues from his years at Bain & Co. He tells us what he's learned about business on both sides of the border.
What have you liked about living in the United States?
One thing I love is Netflix, a service that regularly mails DVDs to me. Its database sifts through the world of film and recommends movies for me.
I always have two films out and I've rated 600 movies that I've already seen, going back to old Orson Welles' films. If I've given something a one-star rating, all of a sudden that genre doesn't show up again in Netflix's recommendations for me.
A new book, The Long Tail, cites Netflix as an example of how to profit from today's niche tastes.
I've read it. The top 10 per cent of movies on release might represent 80 per cent of a video chain's rentals, but it is almost the opposite situation at Netflix. Some Iranian film doesn't get enough rentals to be on the shelf of the local video store, but Netflix has five copies in the entire United States, and someone in the U.S. is going to rent that movie. It's the same with Bollywood movies -- you have a whole country that has no access to them and Netflix is the way to get them.
Doesn't Amazon offer the same breadth and customized recommendations in books?
Yes, but Amazon's recommendations are not as good as those from people I know. I'm always 12 books behind and constantly working through what somebody says I have to read.
What's on top of that pile now?
Wayne Johnston's new book, The Custodian of Paradise. I liked The Colony of Unrequited Dreams and The Navigator of New York. This one is particularly well written -- the sarcasm of the protagonist is great.
Fiction is fun, but I feel it has to be combined with learning. I just finished Augustus by Anthony Everitt, and before that, Caesar by Adrian Goldsworthy. The Roman Empire has been where I've been reading non-fiction. The parallels are amazing with today.
So is Canada a gentler place to do business than the United States?
Yes, but I think the two are converging over time. Everyone is moving toward the same model, which is performance-based. Still, I do think that in Canada, there is more balance and a longer-term focus.
Do you have an example?
When I went to Pep Boys, we had to pretty dramatically rationalize costs. In Canada, that would have been a very big story. I remember sitting down with the PR firm in Philadelphia, within my first couple of months at Pep Boys, thinking we're going to get hammered in tomorrow's paper, that we are closing 33 stores with 860 people to be laid off.
The reality is the news story the next day was almost 100-per-cent positive: 'You've got to get this business ship-shape, and congratulations on those moves.'
But when we closed individual stores up here in my former life, it was a big deal. Part of it is the attitude on those kinds of issues.
In the U.S., if it's good for business, it is a good thing. Canadians more rightly say: 'We're not looking at it as investors, but how does it affect competitors, customers, employees and those communities served?'
Three years ago, you said 'Canadians reward effort, Americans don't care about effort -- they care about results.' Doesn't that suggest the U.S. model is better?
I didn't say it is better, but it is different. The U.S. economic model has been very successful but there are some elements of the Canadian model that a lot of Americans would like to emulate. For example, there is clearly a massive health care issue in the United States.
As a CEO, could you see that?
As an employer, your costs of providing health care to employees have been going up by double-digit [percentages] virtually for 10 years, and it will continue. That's why you simultaneously have to reduce actual benefits. So you get double-digit increases despite the fact that you have to reduce some of the coverage. That's a cost of doing business that they will have to address, because people do need health care.
Do you see positive aspects of the U.S. approach?
I think Americans have been much more apt to change quickly. As an economy, they are stunningly flexible as they move from one generation of what drives success to another. You just think of how they embrace information. I've spent some time in Pittsburgh, which is the example of a city where you go from the industrial to financial services, and to very young technology.
So at Pep Boys, you didn't deliver results that the U.S. system demands?
Probably not the results some of the people would have liked. When I came to Pep Boys, the stock price was $8 and when I left it was a little bit more than $11. There are definitely some funds that would have liked to see it above that.
So what was lacking -- investor patience?
It's a different group of investors now. If you looked back 12 months before, we had long-term investors. But because of the value of Pep Boys' real estate, a billion dollars worth, there were a lot of real-estate-focused hedge funds who said, 'What we would like is that you sell that real estate.' For me, that was a very short-term focus. It would definitely improve the stock price in the short term, but in the long term I don't think it would make Pep Boys a stronger company.
Is this an indictment of hedge funds, your primary antagonists?
I think it depends on what hedge funds you're talking about. Some do have a long-term focus. But the ones that plan to be in a stock for six to nine months clearly don't have a long-term focus.
But most hedge funds do think short term. Isn't that a bad thing?
I think there are some cases where a hedge fund acts as a very positive catalyst, but to me that isn't very exciting. I don't know how much value you can add to a company, either as a passive investor or a private equity investor, in a time frame of six to nine months.
To me that is less interesting than the things that I think dramatically improve the value of a business -- like helping build the right team once you have the right CEO in place, and thinking through the strategy and how to implement it. That's not done in six to nine months.
Selling books is not the same as auto parts. You have to know the business, right?
Look, I think the toughest decisions in business are determining what is the business, who do you compete with, what are the shared costs.
But one thing that's clear from my career is that some fundamentals are true in any business. The biggest one is having the right team in place. I'd much rather have a B strategy with the right team than an A strategy with the wrong team.
What is your big lesson from Pep Boys?
Wherever I worked, if you asked me after the fact for one thing I would have liked to change, it was to have made the right decision sooner. Often it is about personnel -- I stayed with someone too long. Or I stayed with a strategy or an organizational structure too long.
In every single case, you end up saying, 'Boy I wish I had moved sooner than I did on the right thing that we had to do.' But that's like playing Monday morning quarterback: 'I wish I hadn't thrown that pass, or I wish I had thrown to that guy who was wide open.'
Is this new job just a stop-gap
before another CEO role?
Not at all. Anybody going into private equity realizes it is at least an eight- to 10-year sign-up. I've done the operating role for 10 years and I think the skills that I've built, combined with what I did in consulting and venture capital, are exactly what helps in private equity.