RSR Research: What is a Retail Winner, Anyway?
Through a special arrangement, presented here for discussion is a summary of an article from Retail Paradox, Retail Systems Research’s weekly analysis on emerging issues facing retailers.
A couple of weeks ago a friend of mine asked me, "So what is a Retail Winner, exactly? And how did RSR come up with the term?" On the one hand, I was kind of surprised to get the question — it’s kind of a cornerstone of our benchmark reports and anyone who has read a report of ours will know the term is used heavily. It’s also defined in the overview section, though I’ll be the first to admit that the definition there is fairly boilerplate, and we keep it short in an effort to get quickly to the meat, the survey questions and analysis.
At the most basic level, we define Retail Winners as retailers who outperform Wall Street’s expectations for year-over-year comparative store sales growth, which is usually around inflation. In other words, if you’re not growing faster than inflation, then you’re not growing.
But this definition is not without controversy and, in fact, the issues we have with it represent some of the big changes that are happening in the industry. For example, what does it mean to look at year-over-year store comparable sales? Well, if online sales are growing through the roof but store sales are flat, does that mean the retailer isn’t a winner? Maybe not! In fact, we’re seeing more and more where retailers are combining online sales and reporting it as part of their comparable store sales. And we’re starting to see situations where retailers are sub-leasing floor space to complementary retailers, not as store-within-a-store but as wholly separate stores with their own entrances, reducing the floor space in their stores as online takes up more sales.
When customers are shopping across channels, it gets harder and harder to look at just one channel’s sales as the basis for comparison. We’re trying to loosen up that requirement over time, while still being careful not to let a retailer measure something like unchecked new store growth as real "growth." Unfortunately, Wall Street still looks at performance as comp store sales growth, and as that kind of focus tends to drives a lot of executive behavior, we continue to look at it that way too — but always with an eye towards the continued evolution of the measure.
Generally speaking, winners win. They do a better job of incorporating change and the technology that supports change. Most importantly, they focus on the customer and on solving the lifestyle wants and needs of their customers. That’s not about selling stuff — selling more stuff is just the outcome.
Discussion Questions
Discussion Questions: What are the shortcomings, if any, of using same-store sales as a measure of a retailer’s success? Is there a way to incorporate online and cross-channel shopping into performance metrics? How do you quantify retail winners?
The RSR description of a “retail winner” lacks a critical component. That is “how sustainable is the retailer’s strategy and operational approach to the business?” If one looks closely at the real “retail winners,” they consistently grow their businesses, are consistently profitable and consistently adapting to market conditions. Measurable retail success happens over an extended period of time not just a few quarters or a couple of years.
Several traditional retail performance metrics are being challenged for meaning and value, especially those with a physical space element (i.e. same store sales, sales per square foot, etc).
E-commerce, M-commerce, F-Commerce, multi-format (including pop-ups), international shipping, 3rd party pick-up, and global footprints mean assessing “performance” of today’s retailers requires a microscope rather than a magnifying glass.
Sales growth is a critical element in gauging a retailer’s performance, if for no other reason that it is an indicator of traffic and the retailer’s ability to please their customer base. However, with the explosion of alternate formats, comp sales as a measure is rapidly losing its relevance.
I was raised on the notion that “what counts is what’s left over after the smoke clears.” Using that criteria, the important numbers become 4-wall operating margins and growth in EBITDA (Earnings before interest, taxes, and depreciation). These factors not only encompass trends in customer satisfaction, but the innate abilities of the management of the company to grow the company profitably. Using history, you’ll find that a retailer that grows these factors consistently is a “Retail Winner.”
How do I quantify retail winners? Profitable growth. Period. Unless the organization is not-for-profit, bottom line, the company has to turn a profit and show a multi-year trend of growth. Are there other metrics to augment measuring the level of success? Sure. A retailer can look at the growing “reach” they have in markets, both within their intended audience and outside across the globe, whether or not they are a MNC or a local company. Seeing the cultural loyalty and demand for the brand across markets can be a pulse for the level of “winner” the company is. There are retailers that operate in limited markets, however extend their brand to other markets through innovative promotions across multiple channels.
Year over year sales is one measurement, but profitability rules the day. If you are selling more (top line sales), but your bottom line is flat or shrinking it would be hard to consider that retailer a winner. All channels a retailer participates in including on-line should be included when looking at sales and profitability.
All of that said, year over year sales and profits don’t necessarily help you understand future results. What would be interesting is the inclusion of customer feedback/satisfaction and employee morale. These two measurements might help you understand what the retailer will be facing in the coming year. Really happy and loyal customers are a great start to increasing top line sales and profitability. Same goes for employee morale and retention.
Numbers are great and as I stated in my first sentence, profits rule the day, but knowing the heartbeat of the business (customers and employees) may help you better gauge future performance.
I feel the best litmus test of a winner is whether or not they survive and prosper over time–not if their current second quarter is better or worse than their last one.
Same store sales is an easy metric to adopt but it assumes that markets stay constant at worst and continually expand at best.
Based on this logic we should sell more baby food now than we did during the Baby Boom. The only problem is that there are far fewer babies to sell to.
Great businesses endure over time. That’s why long-term sustainability is still the best metric.
Same store sales has been the benchmark forever. I do not see a reason to change it just for change’s sake. But I do think there needs to be a benchmark for customer satisfaction as well as the benchmark for Wall Street’s satisfaction. What that might be is more than I am able to determine.
Quantifying retail winners should also consider the bottom line results. Anyone can grow sales, but winners produce profits!!! Profits produce reinvestment and hiring of employees, so without a business that is profitable, sales growth is just smoke and mirrors.
Great conversation. For most retailers, where ecommerce is a single digit percentage of sales, I do think the traditional measures generally hold up as indicators. That includes SSS, but it also would clearly include store count growth, sales of new stores, profitability, and free cash flow! The reason SSS works so nicely in physical retail is that so many of the business costs are fixed on a asset-by-asset basis and there is little variable cost outside the box, so strong SSS growth usually drives substantial profit growth. The online world is completely different, of course, so I agree that more ecomm-heavy companies need different measures.
Ed Rosenbaum says, “I do think there needs to be a benchmark for customer satisfaction as well as the benchmark for Wall Street’s satisfaction.” This gets at an extremely important point–the customer’s viewpoint. One hard measure of this is convenience as determined by how long it takes them to acquire what they want and need.
I have found seconds per dollar to be the perfect metric for this purpose. The rationale is too long for a short post, but the bottom line is that stores that sell faster sell more. (Duh! Real salesmen know about this kind of stuff.) In supermarkets, cutting just one second from the average amount of time to sell a dollars worth of merchandise in the store is worth a million dollars a year in additional sales.
This is a solid measure of convenience to the shopper that translates into megabucks for the retailer.
So to follow the logic, one would have to declare Walmart a loser with consecutive quarters of declining same store sales? Would anyone be willing to take that leap? I’d like to hear that discussion!
Over recent holiday seasons for some years now, analysts have been unable to quantify online sales, or the impact of gift card sales extending the holiday selling period indefinitely on the overall measure of holiday sales.
Retail winners are defined in so many ways besides and beyond same store sales measurements. Nevertheless, that is a factor in the equation. However, many of the other factors mentioned in the comments so far are equal or greater factors in the overall equation to effectively quantify a retailer as a ‘winner’. Many of the factors are, of course, ‘subjective’. Yet, in large part as mentioned, profitability is a strong factor and relates directly to sustainability. In addition, same store sales increases, even when consecutive, do not equate to profitability.
“Retail Winners” are those that are able to create a substantial number of customers that buy the right items and continuously select them as the retailer to purchase them from when they have other choices. Then again, could that be the same definition as customer loyalty?
Sales increases are nice, profitability is good, but show me the money–cash flow! A retail winner is a retailer who is consistently generating operational cash flow, at a sustained or increasing rate.
Can I pick all of the above?
My first thought was profits, but I also think Ryan makes a great point about sustainability. So I’ll go with long-term sustainable profits!
Lots of great feedback so far. I would add one point. Measuring the success of a retailer according to its sales is like measuring the end result without any regards for the contributing factors nor the time it took to get there. The real winner is the retailer who tidies up its operations, improves its procurement and achieves higher customer service. Results may not be felt immediately, in fact in may take several quarters for “winnings” to happen but they will. Winning is about planning, preparation and execution, not taking the prize home.
Long-term profitable operations. The ability to be creative and flexible enough to meet the ever changing consumer market. Leadership that has a long-term vision and can adjust enough factors to meet pressing, short-term metrics. And I agree with Nikki, it’s not about selling stuff–sales, profits are the result of a happy customer base.