00:00:03
So, we saw three phases. Add stores while you can, then you focus on online, and then the third phase is if you're not getting top-line growth, then you got to cut costs, which I always thought was like a dumb idea, but it's what you do if you can't do anything else.
00:00:21
Welcome to The Ripple Effect, the podcast that takes you on a journey through the minds of work and faculty.
00:00:27
I'm your host, Dan Loney, and in each episode, we'll be diving deep into the inspiration behind the groundbreaking research that Wharton professors have conducted and exploring how their findings resonate with the world today.
00:00:40
Well, we certainly know that our country and the global economy has gone through a lot in the last several years and had to deal with certainly a lot of issues.
00:00:50
Specifically, we're going to talk today about how retailers deal with some of these issues.
00:00:56
And a pleasure to be joined by Marshall Fisher, professor of the Wharton School, here joining us to discuss that.
00:01:02
He has done research into this. Marshall, great to talk to you again. How are you, sir?
00:01:06
I am well, thank you. You know, obviously, we know how important retail is to every country's economy.
00:01:12
And when you have these problems that pop up, and obviously things like the pandemic and such really can cause a problem, it has to be an incredible challenge for retailers to kind of navigate through a lot of these twists and turns.
00:01:27
Yeah, it's a huge challenge. And I mean, the word challenge almost understates it.
00:01:33
We've had COVID. We had our Wharton grad, Mr. Trump, set tariffs on China. At one point, they were like 100%.
00:01:45
And retailers rely on, many of them rely on China. And I worked with one retailer that sourced 95% from China.
00:01:57
And one that we'll talk about in the paper, I'll talk about in this interview, Dillard's was heavily dependent on China.
00:02:06
And they all had to pivot, you know, either raise prices to absorb the tariff or look for other suppliers, which Dillard did.
00:02:20
And then if that's not enough, along comes a war. Yeah. How many bad things can you have thrown at you?
00:02:29
And less apparent, but a force retailers have to deal with is online is going up about 1% a year.
00:02:39
So, at the start of the period we looked at, we looked at 2016 through 2024. At the start of that, it was, I think like 9% and at the end it was 16%.
00:02:54
So pretty much doubled. And you have to adapt to that. So what was the importance then of taking a look at how retail kind of reacts to these shocks?
00:03:06
Well, first of all, retailers in important itself, and they're in the front lines of coping with all of this, right?
00:03:14
So I think lessons for how they're coping is important for the retail segment, which is a big chunk of the economy and might have some lessons.
00:03:26
And I'll tell you what we learned. And we can talk at the end about how did this transfers to other segments of the economy.
00:03:35
And to speak to the we, my partner was Vishal Gore, who has his PhD from Wharton.
00:03:45
He's now at Cornell where he heads up Cornell's MBA program. And he and I had coauthored another paper called Curing the Addiction to Growth.
00:03:57
We looked at retailers in 2011 to 15 and our observation was that all the business press and consulting firms, it's all about growth, growth, growth, growth, top line growth.
00:04:14
But the world economy is growing at three and a half percent. And we looked at Walmart that grew like 60% a year in their first 20 years.
00:04:28
If they kept growing at that rate, their revenue would have been about 30 times the world GDP, right?
00:04:36
So that would have either been a very strange world or ain't gonna happen and it didn't.
00:04:40
So that paper looked at how you manage the transition from when you're young, double digit growth to single digit growth.
00:04:50
So our editor came back to us and said, well, why don't you update that? So we looked at 2016 to 2024 period.
00:05:01
All right. So what are some of the ways that companies try to deal with some of these issues?
00:05:07
You've talked about a couple of different concepts that companies go through. Yeah.
00:05:12
Very, very interesting. Well, first of all, let me just briefly tell you who we looked at.
00:05:18
Our criterion was over a billion in sales publicly traded and a growth rate, a top line growth rate of less than 10%.
00:05:28
So single digit top line growth. There were 32 retailers that meant that criterion, 14 of them beat the S&P growth rate, which was like 12 and a half percent.
00:05:41
Okay. And, and the separation between those 14 and the rest is astounding that the top group was growing their share price appreciation by about 20% and the rest was like minus 0.6%. Right.
00:06:03
It's dead, dead flat. And then circling back to your question, what, what were this?
00:06:09
It's an obvious opportunity for lessons. What were these successful retailers doing that the rest weren't?
00:06:18
It's very interesting. It's not what we found previously held true here. It's a simple formula, but hard to implement.
00:06:30
Just grow revenue faster than cost. So the winners might be growing revenue by 3%, but they were growing costs by 2.7%. So they grew profit and the losers were the reverse of that.
00:06:47
But we, we saw something interesting, which was totally unexpected, that there's a period where it's still profitable to add stores.
00:06:58
So Costco, I think over, over the period we looked at, expanded their store base by like 33%, revenue up 137%.
00:07:12
So was that a good investment? Yeah. Now Walmart, on the other hand, went through a period where they kept trying to, to add stores.
00:07:24
And I think there was a period where they added like 16% to store base and revenue went up 9%.
00:07:34
So you got all that investment, you're trying to, you got all that investment, you're not getting the payoff.
00:07:41
It took them five years to say, maybe we shouldn't be adding stores. In the period we looked at, they had slightly trimmed their store base.
00:07:50
So what did they do? They went on, they focused on online. You also mentioned about, in terms of costs, cutting costs.
00:07:57
But before I get to that, I would think that the element of cutting costs and the element of potentially growing the number of stores that you have has probably been impacted quite a bit by the online component in the last couple of decades.
00:08:12
Yes. Yeah. So, so we saw three phases. Add stores while you can. You hit a wall on store growth, as Walmart did.
00:08:22
Then you focus on online. And then the third phase is, if you're not getting top line growth from either of those sources, then you got to cut costs.
00:08:34
Which I always thought was like a dumb idea, was what you do if you can't do anything else.
00:08:40
Dillard's had virtually flat revenue throughout this period. They grew their profit from, they were averaging $137 million a year in profit.
00:08:55
They grew that to over a billion. Right. Just by cutting costs, the cutting, trimming costs that save you a lot of money while doing minimal damage to the top line.
00:09:11
So if it makes sense to you, we can talk about those three retailers. Sure. Yeah.
00:09:21
And how they were, and how they kind of got through each one of those scenarios.
00:09:25
Correct? Yeah. Yeah. So Costco, top line growth, adding stores. Walmart, don't add stores, but grow your online component.
00:09:34
And then Dillard's cut costs. And I would guess between the different stores there, just as a consumer myself, Costco probably doesn't have as much of the investment in the online component as, say, Dillard's or Walmart.
00:09:53
Correct? Right. Correct. I don't know about Dillard's. But Costco sort of ignored online for a while.
00:10:06
And in each of these three retailers, I was fortunate to have some good contacts.
00:10:10
We interviewed, I think, seven different senior executives, or executives from seven different retailers.
00:10:17
These three really stood out to us. And their performance was all stock appreciation, north of 20% for this seven-year period.
00:10:30
That's pretty good. So my contact at Costco was Richard Galante, who I'm proud to say was a Wharton graduate, undergraduate.
00:10:44
He slipped a bit in his MBA. We won't mention where he went. And he was, like all good MBAs, working in investment banking when Costco at the time had 10 stores.
00:10:57
Right. And they called him up and said, we're looking for a CFO. Are you interested?
00:11:02
Now, Richard's dad, Richard grew up in Atlanta, and his dad had, I think, a four-store chain.
00:11:11
And his dad said, don't take that job. The retailer with 10 stores is going to survive.
00:11:19
But he thought, I'll try it for a year. This is 1985. I'll try it for a year. He joined as CFO in 1985.
00:11:32
He retired a year ago. So he had that job. He was basically number two in the company.
00:11:40
Now, you think about what does a retailer need to do. They've got to treat their staff well.
00:11:56
They have to focus on excellent customer service. And there's a long list of things that they could focus on.
00:12:08
And one of the lessons from Costco is you can't do it all. So what do they focus on is basically low cost and a somewhat attractive assortment, provided that if you're looking for toilet paper, you're ready to buy 30 rolls.
00:12:33
Yeah. You're good to go. And it's interesting. Their rank ordering of their various stakeholders are first customers, then employees, then suppliers, and last, shareholders.
00:12:56
Okay? They rate last. So like a lot of retailers, they get close to the end of the quarter.
00:13:06
And they're a couple of pennies a share away from making their numbers. What do they do?
00:13:13
They cut staff, which is easy to do. They've got part-timers. So they call up Sally and Joe and say, you know, you're scheduled to come in 20 hours a week.
00:13:23
That's what you've been doing. We want to cut that to 15. Okay? I'm sure it's a calculation most retail CFOs can do in their sleep.
00:13:33
How many hours? We've got to cut hours. In fact, I had a friend. I won't name the people here, but he was COO of a major retailer.
00:13:48
And the chief financial officer called him up, and he said, we've got to cut 10% of our staffing.
00:13:59
We've got three weeks to go. Right. And my friend says, well, Mike, you know, it'd be really complicated to cut 10% of hours across all our stores.
00:14:10
Why don't we just close 10% of our stores? Yeah. And the CFO says, are you crazy?
00:14:17
Think of all the sales we'll lose. My friend says, uh-huh. So his message was, you're going to lose sales one way or the other.
00:14:26
I said, what's what most retailers do? Costco doesn't do that. They got a bad quarter.
00:14:31
They say, suck it up, Wall Street. And what does Wall Street think of that? They're trading at 57 times earnings.
00:14:39
Yeah. So how does Dillard's compare with what Costco does? Because obviously, it's a different footprint because it's considered kind of a mall store.
00:14:50
Yeah. Yeah. No, it's a totally different footprint. So Dillard's is much more about excellent customer service.
00:14:58
With a Southern accent. Exactly. They're mostly in the South. They compete with Nordstrom's and Macy's, both of whom are struggling massively.
00:15:15
Nordstrom's lost money, lost money, lost money, and took themselves private. I think it's embarrassing.
00:15:23
Walmart, we interviewed Mark Lorry, who was in the Wharton MBA program for one year.
00:15:32
We still claim him. Our development office claims him as an alum because he's probably a billionaire now.
00:15:40
He founded Jet.com while a student and then sold that to Walmart. And then Jet became their online engine.
00:15:50
So as I mentioned, I think Walmart's struggled for knowing when it was time to stop opening stores, and they pivoted to online.
00:16:00
Mark grew their online revenue from $14 billion to $150 billion. Massive expansion of online.
00:16:11
And he did a few things. Previously, before he joined, Walmart was matching price with their stores so their customer would see the same price online in the stores.
00:16:26
And Mark said, well, that's pretty dumb. Our competitor is Amazon. Why don't we match Amazon on price?
00:16:32
The store people said, no, no, no, you'll cannibalize our stores. And he said, well, which do you prefer, that we cannibalize our own stores or Amazon cannibalize our stores?
00:16:46
So he grew their online revenue to their second no only to Amazon. In talking with him, there was this constant tension that the online business is different from the store business, and they were rooted in the store business.
00:17:02
He was in an interview once with the head of stores, and the interviewer said, well, how do you relate to your store counterpart?
00:17:09
And he says, very simple, he makes the money and I spend it. So this is like massive investment.
00:17:18
And when I talked with Mark, Mark has gone on, by the way, to another business he calls Wonder, which is taking food delivery to a new level, which seemed to be going pretty well for him.
00:17:33
But there was always this tension, which he managed, I think, pretty well. So that's the Walmart story.
00:17:43
And they're now profitable in their online business, which when I talked with Mark, surprised him a little bit.
00:17:51
But they steadily decreased their losses, expanded their revenue footprint massively, and turned that business around profitable.
00:17:59
So that's an excellent example of a company that took about five years to figure this out, but we can't open stores anymore.
00:18:11
So we're going to pivot the line and made that work super well. Dealers, during our study, their revenue was flat.
00:18:26
So for, what, seven years, just totally flat. They didn't like that. So every year they would seek to grow the top line.
00:18:40
So they would buy more than what they had bought the previous year. Customers didn't cooperate in their effort, and so they ended up selling stuff at markup and losing money.
00:18:58
During COVID, they had to close all their stores. They were required to close their stores, which gave them a chance to step back and reflect.
00:19:08
And they said, you know, why are we doing this, of constantly trying to push the top line and never succeeding, and all we're doing is generating markdown losses.
00:19:22
So they pivoted to a very simple idea, but simply buying the same amount as they sold the previous year.
00:19:31
They cut their markdowns from, I think, 12. Like, they were always on sale, one markdown a month.
00:19:43
They cut to just three markdown periods, Christmas, back to school, some other holiday.
00:19:53
The net, and they trimmed their store hours. They found that by cutting their open hours during the day by two hours, open one hour later and close one hour sooner, they could get rid of one ship, so they were operating two ships.
00:20:15
So they made significant cuts in labor. Their profit went from averaging 137 million to over a billion.
00:20:24
In fact, their earnings multiple, I think, was 27, 27 times earnings. So that's a success story.
00:20:35
I always thought cost cutting was like failure. You know, it's what you do when you can't do anything else.
00:20:43
They somehow made it work, and then they're a cash machine, so they bought a shopping mall.
00:20:50
It'll be interesting to see where they go from here. Having seen all three of these examples, what do you think companies can take from this research to better or to best deal with these times of struggle that are not necessarily tied to their business, but obviously they have an impact on their business?
00:21:11
What should they take away from this? Yeah, so I think the most important thing is don't force growth that isn't there.
00:21:24
That in all of the unsuccessful examples, and this harks back to the earlier paper, Curing the Addiction to Growth, there's an addiction to top-line growth, maybe because it's simple to think about.
00:21:41
I mean, everywhere you read, even today, it's how do we keep growing, grow the economy, grow, if you're a business, grow your top line.
00:21:53
You need to be savvy about, yes, grow as fast as you can, but don't try to push growth to the point where it's unprofitable.
00:22:07
And the investments you make to try to push growth have a cost, obviously. I mean, for each other, you can open more stores or you can do a bunch of things to push your online sales.
00:22:21
You need to be very tough-minded about doing a return on investment analysis for all those things that you can do to push growth.
00:22:31
Are they paying off? So the unsuccessful returns, and I think this would be true of anybody who tries to force growth, the unsuccessful ones just couldn't let go of top-line growth and pushed it to the point where it was a money loser for them.
00:22:53
Marshall, great to talk to you again. Thanks very much for your time. All the best.
00:22:57
Thanks, Dan. Always a pleasure. Have a good day. Thank you. Marshall Fisher, professor here at the Wharton School.
00:23:04
Thank you for listening to The Ripple Effect. We hope you found this episode informative and engaging.
00:23:09
Don't forget to subscribe and leave us a review so that we can continue to bring you the best insight from the Wharton School.