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our guest today is Marshall Fisher from
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the operations information and decisions
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department at Wharton and we're gonna
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talk with him about a new study that he
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has just published in the Harvard
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Business Review with two of his
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co-authors Vishal Gore and herb Klein
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Berger about lifestyle stages in the
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retail industry Marshall welcome to
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knowledge at Wharton and thank you so
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much for joining us thank you Michael
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it's pleasure to be here as always so I
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wonder if we could begin by telling us a
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little bit about how the idea for this
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story came about so gosh my co-authors
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and I have worked with retailers for
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long time maybe 20 years and back in the
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mid 90s when we started working with
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each other it's all the successful one
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or many of the successful ones were
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category killers that had been founded
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in the 70s and we're still growing at a
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hugely rapid rate you can think of Home
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Depot staples Urban Outfitters long list
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of retailers that was the iconic success
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of the time still pretty young still an
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innovative format still rapid growth and
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I remember wondering you know eventually
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we could add Walmart to that list
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eventually this this can't go on forever
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I looked at Walmart's growth rate in
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their first 20 years it was 43 percent
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per year compound annual growth rate I
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did a little calculation as to what
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their revenue would be now today had
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they kept growing at that rate and the
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answer was like the revenue would be
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more than tripled the world's GDP so
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it's obvious that you eventually run out
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of places to put stores or if you're
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even an internet retailer growth the
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rapid growth depends on attracting new
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customers there's a finite number of
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people in the world so you're gonna have
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to slow and my co-authors and I wondered
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then why you know do you curl up and
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given how much emphasis is placed on top
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line growth it's it's glamorous it's
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cool it's everybody likes it so what
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happens when it inevitably slows how did
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you go about conducting your study so we
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got we Vishal being our data analytics
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guy collected data on gosh several
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hundred publicly traded US retailers and
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we narrowed that down to 37 retailers
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that had been continuously in business
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for a 22-year period ending in 2015
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because we were doing the study we
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actually ended in 2014 because we were
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started this in 2015
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took a couple years and we updated it on
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and as a group they'd been growing at
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around 15% and in the last five years
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that growth had slowed to four and a
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half percent so they'd all gone through
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this life cycle of rapid growth to
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maturity and most of them had kind of
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languished as their stock had been flat
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in the last five years but there were a
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handful that were really rocking the
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example was Foot Locker had experienced
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single-digit growth in the last five
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years but total stock market return of
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33 percent per year which is kind of
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the S&P oh and for a five-year
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period that's that's remarkable growth
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and the question is of course if this is
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a group of handful of people that are
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rocking and I think off the group of 37
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there were 17 right that sort of that
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forged that that that were successful
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how did they do it so first of all they
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we defined successes five-year total
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stock market return that exceeded the
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S&P 500 return so 17 were above 20
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they did a couple things they stopped or
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greatly slowed their rate of opening new
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stores and got and by the way the
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winners and losers had essentially the
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identical growth rate top-line growth
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rate the winners got that growth mostly
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through existing stores whereas the less
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successful group got their growth mostly
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by opening new stores so you can think
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about which is easier opening a new
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store or somehow getting your customers
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to you know drive more traffic and more
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sales through existing source first
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things much easier much easier to open a
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new store not trivial but a lot easier
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but which is more creative to earnings
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it's the comp store sales because you're
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leveraging an investment you've already
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made in your existing store so where
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each other is called comparable store
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sales growth is incredibly enhancing to
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profit well what's interesting to me is
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even the opening new stores as easier
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it's also probably much more expensive
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it's much much and and so going back to
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the title of your study what's driving
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this addiction to growth even though
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people realize that they did it they're
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driving growth right at the cost of the
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right yeah exactly
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um and just to re-emphasize the point
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you made about opening stores has a cost
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associated with it when Walmart was
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growing at 43% they were opening stores
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at about the same rate forty three
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percent and their profit was growing
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about forty three percent so what are
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they doing they're running their
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business through a copy machine there is
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turning out more and more copies of the
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exact same business they did some
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enhancements to the business model but
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for the most part you're just scaling
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okay that's a great game to play as long
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as you have enough places to put new
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stores to play that game eventually
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you're putting stores in less desirable
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locations you're cannibalizing existing
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stores and so suddenly you open X
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percent new stores and revenue doesn't
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grow by X percent it grows by something
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a little smaller than X percent and then
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what happens is your expenses are
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growing faster than your revenue which
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is eroding eroding your earnings why is
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it so hard to let go of that cuz I
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thought the most interesting finding was
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not the formula for success which is
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drive comparable store sales once Bob
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Marshall from McDonald's had been a vice
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president with McDonald's they were one
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of the successful to reach others I
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talked extensively with Bob an
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interesting guy he said look the formula
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for success is scale until you run out
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of geography and then drive comp store
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sales until you run out of ideas so the
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scaling by opening new search that's
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pretty much an execution game if you if
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I would be with a Walmart exactly if
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they're constantly on their iPhone I
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mean they're working like demons Sun up
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to summon Sun said whether to do lists
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they're executing because that's the
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open star game the driving comes since
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you kind of be more thoughtful that's an
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idea game they're very different games
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if you not to pick on Walmart or
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something like I am because I have great
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admiration for them but if you are
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playing the execution gain they famously
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disdain hiring from the Ivy League you
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know and we don't need those highfalutin
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Ivy League types that's a different kind
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of talent then if you're figuring out
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ideas I can tell you what some of them
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were for driving additional sales
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through your store so it's a different
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game requires different talent I think
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in general the popular world the
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business commentators
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like growth it's a positive simple story
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and understand this idea that oh yeah
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we're not growing the top-line all that
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much but we figured out all these smart
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ways to grow our bottom line that maybe
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sounds a little like financial
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engineering to people in their ice-class
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over so whether it's the financial
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investment world the stock market
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analysts consultants they all like to
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talk about the growth story so it's it's
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a kind of addiction I think and also if
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you've been opening stores and that's
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been your modus operandi you've got a
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whole group within the company whose job
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is to is to open stores you would have
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to you know fire that group or curtail
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them so there's a infrastructure in most
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retailers both emotionally and
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physically and external forces leading
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that way that make their first thought
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when growth slows to redouble their
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top-line growth there's kind of a denial
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period I understand and all there were
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many of our successful retailers Home
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Depot McDonald's would be a couple
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examples they went through a period of
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maybe five years where they pushed
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growth beyond the point where it was
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there to be profitably had and had at
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some point say wait a minute this isn't
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working we got to change our game in
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changing the game how do you make the
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transition from a mindset that is
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focused on execution execution to a
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mindset that's focused on ideas how do
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you do that so what step one I think is
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to accept reality so you need to collect
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metrics sales per store for example or
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you must do the successful induced
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return on invested capital so for a new
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store there's an investment there's a
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return which is the profit on the sales
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you need to
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slow or stop opening new stores when
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that number goes the wrong way so that's
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step one I think is simply look around
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you and assess the effectiveness of what
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you're doing then um there's a different
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set of projects you've got to put on
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your capital budgeting list which are
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things that drive comparable store sales
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through your existing stores example
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footlocker got a install the device this
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is one of like 20 or 30 things they did
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because it's called a scan gun we all
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know what the Shu process it's like you
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go in him told sales assistant what
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you're looking for he goes to the
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backroom he brings out two or three
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parachute try them on maybe one doesn't
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fit one you like don't like the color
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and he goes back and forth to the back
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room typically five six trips it takes a
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long time and meanwhile you're leaving
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the customer sitting there so Foot
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Locker put in place the scan gun that
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would let the sales associate while he's
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in front of the customer know exactly
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what's in stock in the back room of that
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store neighboring stores or on the
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internet so he could have a more helpful
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conversation with the customer on what
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they've got that might be more what
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you're looking for and could have an
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assistant bring those shoes shoes out to
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them so that ended they estimated two
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percent to store sales not a huge number
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but you do twenty or thirty things like
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that all of those taken investment just
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as opening a new store takes an
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investment so I would say in your
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capital budgeting process you start
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looking at not just new stores as
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investments to drive top-line but things
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you can do within the stores like
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technology in addition to Foot Locker
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you also mentioned Home Depot and and
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McDonald's right as retailers that did
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very well have any examples of some of
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the ideas that they implemented to
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two more intensively attractive stores
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yeah and other ones I put on that list
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or Macy's Dillard's and Kroger
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so Home Depot did private label they
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conceived and added private label
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products to their stores they you
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leverage the Internet omni-channel
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Macy's had a concept they called their
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mom strategy was an acronym my Macy's
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was the first time omni-channel was the
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second
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so my Macy's was localizing assortment
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by store you think about what are the
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call-out factors of production and
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restore it's the assortment you offer in
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what quantities at what price and what
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staffing levels do you have in the store
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all of those things do this in my
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research you can measure you'll see
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variation over time and staffing levels
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for example you can measure correlate
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that you can do the same thing with
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price with what's happening to revenue
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measure the impact of changing your
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price on revenue or changing staffing
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levels in this store and a particular
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hour on revenue so all those things can
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be optimized McDonald's did menu
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additions added things to their menus
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Croker used analytics a lot in their
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stores give you an example they they
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know I don't have traffic on earth so
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they know when people are entering the
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stores they also a POS status so they
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know when people are leaving this store
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and they know typically how long it
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takes someone to shop in the store so
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they started this may sound low-tech but
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it had a big impact
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they started forecasting when people
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would show up at the cash register and
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then staffing to that forecast cut the
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wait time I think to check out from
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remember right something like 3 minutes
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to 10 seconds so that drove one or two
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percent comparable store sales right you
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look at all of these things any one
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thing
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is a little bit of blocking and tackling
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it looks not that dramatic but one or
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two percent plus sales if you're doing
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20 or 30 things like that becomes big
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big news that that's how the total stock
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market returned
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of the 17 retailers had followed this
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approach over the period 2011 2015 was
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twenty percent significantly above S&P
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500 the the other group 20 retailers
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that continued to rely mostly on opening
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new stores their total stock market
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return was 2% so factor of 10 difference
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between the successful retailers and the
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less successful now one of the stories
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we often hear in the media is that
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retailers are doing badly and repeatedly
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we hear news stories about you know
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retail chains going bankrupt and and and
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so the overall narrative seems to be
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that blick brick-and-mortar retail is
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doomed because of the internet to what
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extent do you buy into that narrative or
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is it too simplistic it's too simplistic
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our our story I guess would be a little
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more nuanced to said first of all we
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think that assuming a consistent
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situation for the entire retail industry
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is obviously silly you've got new
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startup retailers lots of them that are
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still in the high-growth days you've got
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some retailers that probably their
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reason for existing is gone away and
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they are going to go out of business but
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I think what we learned is that a
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segment of retailing bricks and mortar
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retailers that have gone through a life
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cycle of high growth in a row in
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maturity that segment is struggling
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because they're for the majority of them
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are following the wrong strategy and by
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the way this applies not just to
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retailers but I think any company or
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countries need to adjust their strategy
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at different points in their life size
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so China was high growth for once their
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economy opened up in 1979 dad you know a
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huge growth through basically labor
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costs to arbitrage well wage rates have
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gone up in China double digits which is
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good that's what the Chinese government
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wanted but eventually you can you can't
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play that game anymore so their growth
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has slowed they got to play a different
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game
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so retailers companies countries I think
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all need to adjust their strategy over
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time as they start with high growth and
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inevitably see that growth not decline
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but slow slow so we're not talking no
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growth ken Hicks from footlocker come in
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and he said I can leverage as little as
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two percent revenue growth so he can
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live with two percent same with Macy's
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but not zero or or negative we had with
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us right now the CEOs of some companies
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that are up against this slowing growth
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phenomenon what advice would you give
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them to do they should deal with it well
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recognize that it's a change that so
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I've talked about retailing we're
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opening stores is the growth in store
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instrument or the most commonly used one
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and their change would be to shift to
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doing investments in technology or
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process changes within their stores to
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drive comparable store sales growth
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other companies non retailers I think
00:19:14
would have to think through what is that
00:19:16
logical shift in strategy so we talked
00:19:21
about China what they're doing is some
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shifting out of low-end manufacturing
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they don't want to be the t-shirt maker
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of the world anymore and focusing on
00:19:31
innovation branding and selling within
00:19:36
the
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internal economy and there's some
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Chinese companies emerging that are a
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different breed from the factory owners
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that made Footwear an apparel in the
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80's 90's and even the last decade so
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that so that's another example of the
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largest by population country in the
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world going through this same
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transformation interesting what
00:20:02
surprised you most about this study
00:20:05
that's an interesting question that
00:20:08
there that you can be phenomenally
00:20:11
successful that the successful group put
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up 20% stock market return over a
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five-year period Oh
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phenomenally successful that they all
00:20:25
followed a pretty consistent strategy
00:20:28
that it was when I would talk to people
00:20:31
about how do you grow your earnings when
00:20:35
your top-line growth slows coming answer
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would be will its cost-cutting right
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it wasn't cost-cutting it was asset
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leveraged so it was a different strategy
00:20:44
than we thought of so those were all
00:20:48
surprised is the biggest one though is
00:20:50
just how many companies have this
00:20:53
addiction to growth and it took us a
00:20:56
long time to come to that title but it
00:21:03
was slowly dawned on us when we looked
00:21:05
at even the successful companies that
00:21:07
went through periods of denial Home
00:21:10
Depot McDonald's and how hard it was for
00:21:14
them to make the transition and in fact
00:21:18
would ask you one last question Marshall
00:21:21
did any questions come up during the
00:21:24
study that you would like to address
00:21:25
through future research and if so what
00:21:28
would that be I think maybe it would be
00:21:31
interesting to see the degree to which
00:21:34
this applies to internet retailers
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because even though they don't open
00:21:39
stores they do acquire customers and
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just as there's finite space for stores
00:21:44
there's finite customers in the world I
00:21:47
think it'd be interesting to
00:21:49
think about how it applies lifecycle
00:21:52
idea to companies other than retailers
00:21:54
or to countries
00:21:57
Marshall thank you so much for talking
00:21:59
with knowledge thank you Michael it's
00:22:00
always a pleasure
00:22:09
[Music]
00:22:17
you
