Wharton’s Marshall Fisher discusses why retailers must break their ‘addiction’ to top-line growth.

Successful retailers can grow quickly in their early years simply by opening new stores. But eventually they run out of real estate, and then they need the discipline to stop opening new stores and focus instead on driving more sales through their existing stores. They can boost sales and profits dramatically by making changes in the way they run their existing stores, such as with help from analytics and the use of technology.

Small-Cap Retailers
Image source: Wikimedia Commons

In fact, several such small changes brought in profits that helped 17 retailers outperform the stock performance of the S&P 500 index, according to a new study titled “Curing the Addiction to Growth” published in the Harvard Business Review by Marshall Fisher, Wharton professor of operations, information and decisions, along with his co-authors, Vishal Gaur (who has a PhD from the Wharton School and now is a professor at Cornell’s Johnson School) and Herb Kleinberger (who has an MBA from Wharton and for many years led PWC’s retail practice).

The study covered a 22-year period, ending in 2015, at 37 companies. This group began the 22-year period with double digit top-line growth, which inevitably slowed to the low single digits during 2011-2015 as the retailers reached the maturity stage of their life cycle. Some winners, such as footwear retailer Foot Locker, saw their stock market returns grow 33% a year over this period, or nearly triple the S&P 500 average. Others that witnessed handsome stock market gains include Home Depot and McDonald’s.

The lesson for the laggards is to pause, acknowledge the slowing growth, and look for solutions other than opening new stores. Fisher says retailers, as they mature, must break their “addiction” to top-line growth and adjust their strategies to the changed realities. He sees that maxim play out also with companies outside the retail industry. That approach could apply even to countries as they shift gears, he says, citing China’s efforts to move away from low-end contract manufacturing for the rest of the world to building its own brands for its domestic market.

Fisher spoke about the chief takeaways from his research in a video interview with [email protected] (An edited transcript of that interview appears below.) He and HBR editor Steve Prokesch also discussed it on the [email protected] show on Wharton Business Radio on SiriusXM channel 111. (Listen to a podcast of that conversation below.)

[email protected]: How did the idea for this article came about?

Marshall Fisher: My co-authors and I have worked with retailers for a long time, maybe 20 years. Back in the mid-1990s when we started working with retailers, many of the successful ones were category killers that had been founded in the 1970s and were still growing at a hugely rapid rate. You can think of Home Depot, Staples, Urban Outfitters – a long list of retailers. [They were] the iconic success of the time. [They were] young, had an innovative format, [and posted] rapid growth.

We can add Wal-Mart to that list. I remember [thinking that their growth rate] can’t go on forever. Wal-Mart’s compounded annual growth rate in its first 20 years was 43% a year. If Wal-Mart had kept growing at that rate, its revenue [today] would be more than triple the world’s GDP.

It’s obvious that you eventually run out of places to put stores. Or if you’re an internet retailer, rapid growth depends on attracting new customers. There’s a finite number of people in the world, so you’re going to have to slow eventually.

Why is so much emphasis placed on top-line growth? It’s glamorous. It’s cool. Everybody likes it. My co-authors and I wondered, what happens when top-line growth inevitably slows? Do you curl up and die, or is there a way to prosper with single digit revenue growth?

“What happens when top-line growth inevitably slows? Do you curl up and die, or is there a way to prosper with single digit revenue growth?”

[email protected]: How did you go about conducting your study?

Fisher: Vishal [Gaur], our data analytics expert, collected data on several hundred publicly traded U.S. retailers. We narrowed that down to 37 retailers that had been continuously in business for a 22-year period ending in 2015.

As a group, [the retailers in our study] had been growing at around 15% [a year]. In the last five years, that growth has slowed to 4.6%. They had all gone through this lifecycle of rapid growth to maturity, and most of them had languished. Their stock had been flat in the last five years. But a handful were really rocking. Foot Locker, for example, had experienced single-digit growth in the last five years, but [had a] stock market return of 33% per year, which is triple the S&P [index] over a five-year period. That’s impressive.

How the Winners Did It

[email protected]: That’s remarkable growth. Of the group of 37 companies, 17 were successful. How did they do it?

Fisher: First of all, we define success as five-year total stock market return that exceeded the S&P 500 return, so 17 companies were above [that level]; 20 were below.

They did a couple of things. They stopped or greatly slowed their rate of opening new stores. By the way, the winners and losers had essentially identical top-line growth rates. The winners got that growth mostly through existing stores, whereas the less successful group got their growth mostly by opening new stores.

You could think about which is easier – opening a new store or somehow getting your customers to drive more traffic and more sales through existing stores. The first is much easier. It’s much easier to open a new store, [although that is] not trivial. But which is more accretive to earnings? It’s the comp-store sales because you’re leveraging an investment you’ve already made in your existing stores. So what retailers call comparable-store sales growth is incredibly enhancing to profit.

[email protected]: Even though opening new stores is easier, it’s also probably much more expensive.

Fisher: It’s more expensive.

The Growth Addiction

[email protected]: Going back to the title of your study, what is driving this addiction to growth even though retailers realize that they’re driving growth at the cost of their profits?

Fisher: Let’s first recap the growth model. When Wal-Mart was growing at 43%, they were opening stores at about the same rate – 43%. And their profit was growing at about 43%. So what they are doing is running their business through a copying machine. They’re just turning out more and more copies of the exact same business. They did enhancements to the business model, of course, but most of the gain came from just scaling the business.

That’s a great game to play as long as you have enough places to put new stores. But eventually you’re putting stores in less desirable locations, and you’re cannibalizing existing stores. So, suddenly when you open X% new stores, revenue doesn’t grow by X%; it grows by something a little smaller than X%. Then what happens is your expenses are growing faster than your revenue, and eroding your earnings.

Why is it so hard to let go of

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