Top execs preach productivity

Don Hogsett, January 19, 2004

In a broadly over-stored retail environment, and especially with Wall Street focused on the short-term and a retailer's bottom line, the time is now for retailers to shift their focus. The change will take them from building more bricks and mortar to improving the productivity of their existing store base, merchants were cautioned at last week's National Retail Federation convention held here.

"Retailers have to focus on space productivity and look beyond square footage expansion and opening new stores," said Phil Kowalczyk, managing director of the consumer products division, North America, of Kurt Salmon Associates (KSA), the Atlanta-based consulting company.

"It's imperative that retailers begin to focus more intensely on sales per square foot and GMROI (gross margin return on investment). The long-term growth story is not about expansion, it's about making the most out of what you have."

And that tight focus can pay off, he pointed out. "Sales per employee grew 3 to 5 percent for the top 100 retailers since 2001, some of that through head-count reduction."

But that's a tricky proposition, Kowalczyk acknowledged. "Retailers have to invest in innovation to keep the consumer happy, and make enough of a profit to keep Wall Street happy. It's a balancing act."

Funding innovation doesn't come cheap, but it doesn't necessarily mean taking on debt and adding baggage to the balance sheet, said Brian Devine, chairman, president and CEO of PETCO stores. "The way we do it, in any given quarter, if we're ahead, we take half the amount we're ahead by and re-invest that. You have to re-invest, because the greatest risk is stagnation."

Addressing the challenge of maintaining growth without building excess capacity, Mark Friedman, Merrill Lynch retail analyst, told retailers, "Saturation is a real issue, because retailers feel a very real need to expand to generate the kind of double-digit growth that Wall Street rewards." But segmentation, said Friedman, can be a more effective strategy than duplicating existing stores. "Take the example of Williams-Sonoma, where Pottery Barn developed Pottery Barn Kids."

Another strategy for layering on growth without adding new stores is building new business centers into existing doors, said Joe Doody, president of North American delivery for Staples. "You can leverage your core competency by adding services, not just products. At Staples, we've put in a copy center and put in a shipping center."

Echoing the sentiment was PETCO 's Doody. "Adding services is just as important as adding new products." A case in point, he said, has been the addition pet 'spas,' grooming centers, to some of its PETCO stores.

KSA's Kowalczyk said that kind of innovation is of paramount importance. "Innovation is crucial to make that consumer connection. And remember, innovation never comes from an articulated need. It comes from an insight into an unarticulated need. The lesson is anticipate."

Kowalczyk exhorted retailers to keep in mind the results of a recent KSA survey. "Seventy-five percent of consumers said one-stop shopping doesn't exist. They said stores are too big and too difficult to negotiate. And your customers expect you to figure them out. They're tired of trying to figure you out."

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