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