Curing the Addiction to Growth

Presented by:
MIZANUR RAHMAN
MBA (Canada) PhD (Dhaka)
Professor of Marketing
Dhaka University
The Proposition of the Article

• In the early stage, they can

grow their sales and profits
• Companies must apply by opening more new stores
different strategies at • But when business matures,
different stages of the they need to curtail
product lifecycle. expansion and rely on
operational improvements at
their existing stores to have
positive impact on earnings

Dr. Mizanur Rahman @ Dhaka University

Low-growth Strategy at Maturity Stage

• Top line (sales) declines slowly

• Bottom line declines faster
• At this stage, if you apply ‘low
growth strategy’, then
─ Your revenue increases faster than
expenses
─ You can stay in the maturity stage for a
very long time, forestalling decline

Dr. Mizanur Rahman @ Dhaka University

What Less Successful Retailers Do

• Continue to chase growth by

opening new stores recklessly

• It crosses the point of

diminishing returns

• Eventually decreases ROIC,

faces diminishing returns, and
cannibalizes sales

Dr. Mizanur Rahman @ Dhaka University

Why Most Retailers Don’t Follow the
Simple Strategy

Three Reasons

1. Capitalist culture celebrates growth

2. Not knowing when to make the
transition in strategy
3. Lack the capabilities to make the
switch

Dr. Mizanur Rahman @ Dhaka University

When Growth Stalls

The retail life cycle follows a classic S-curve

• Firms grow quickly in their early
years by opening stores and
penetrating new markets

• Once the most attractive sites have

been exploited, they add stores in
increasingly less attractive locations

• As their store networks become ever

more dense, new stores begin to
cannibalize the sales of existing
ones, reducing the net sales gain for
the entire chain.

Dr. Mizanur Rahman @ Dhaka University

 Wal-Mart Growth Stalls
Wal-Mart: 2006, cannibalization

Time Store Count Sales Net Income

Jan 31,1968 24 $12.6 m $482, 000

1988 1198 $16 b $627.6 m

• Compound annual growth rate • But growth cannot continue

(CAGR) 43% over 20 years
• Value creation in the growth
phase comes from scaling the
business, not necessarily from
increasing profitability
forever
• 2015 revenue would have
been $246 trillion
• Reduced by 2.7% from
2011-2015

Dr. Mizanur Rahman @ Dhaka University

Above Average- and Below Average Stock Return

Dr. Mizanur Rahman @ Dhaka University

 Transition from High-growth to Low-
growth strategy

• Track the right metrics to detect when you

should begin transitioning

1. ROIC
No body tells
2. Revenue per store
when to switch to
3. Estimated revenue a maturity
added per new strategy
store

Dr. Mizanur Rahman @ Dhaka University

 Track the Right Metrics

1. ROIC which will considers 4 things

̶ Sales forecast for the new store over time
̶ Operating expenses
̶ Required capital investments
̶ How much the new store will cannibalize the sales of
nearby stores

Macy’s Rejection vs. Competitors’ Injection

Dr. Mizanur Rahman @ Dhaka University

 Track the Right Metrics

2. Revenue per store

̶ Total Revenue ÷ Total Store Count

3. Estimated revenue added per new store

̶ (Total Actual Revenue−Estimated Revenue from
existing stores) ÷ Number of New stores

Dr. Mizanur Rahman @ Dhaka University

 Stop Opening New Stores

WHEN TO STOP?
Diminishing impact on total revenue & ROIC
• Wal-Mart: “We are a growth company; we just
happen to be a large one”

• In the fiscal year ending January 31, 2016, it was the

first in its history that Wal-Mart’s sales declined

Dr. Mizanur Rahman @ Dhaka University

 Rocky Denial Period
McDonald’s
• Growing by opening new stores up to 1998
− In 2003, a new CEO (Jim Cantalupo) reversed actions
− He divested the acquisitions, stopped opening new stores
− He focused on increasing the sales of existing stores through
improved service and customer satisfaction
Home Depot
• Arthur Blank-store opening machine
− After 2 decades Bob Nardelli – no more opening stores
− In 2007, Frank Blake stopped opening stores.

Dr. Mizanur Rahman @ Dhaka University

 Influence of the 2 Different Strategies

• Comparison between two company

Company Stock Sales Operating Operating Store Average
Return Expense Profit count Comp
sales
Foot 33.0% 8.0% 6.2% 23.6% 0.1% 8.0%
Locker
Finish Line 2.2% 9.0% 10.3% -4.6% 9.7% 4.8%

From 2011 through 2015, Finish Line actually Foot Locker’s strategy to improve
grew sales at a higher annual rate than Foot operational performance relied
Locker—9% versus 8%—but most of Finish on leveraging real estate,
Line’s increase came from opening new stores. inventory, and staffing.

Dr. Mizanur Rahman @ Dhaka University

Strategy to Adopt to Improve Operational
Performance

• Boost sales from existing stores

̶ Close unproductive stores, remodeling stores in best
locations

• Invest in analytics to ensure that customers

get attractive value
̶ Product assortments and price

• Leverage strategy
̶ Achieve operational improvements

Dr. Mizanur Rahman @ Dhaka University

Strategy to Adopt to Improve Operational
Performance

• Keep an eye on product development

̶ Identify and test potential offerings
̶ Think about private level brands

• Staff at the right levels with the right team

̶ Hire the right people and train them
̶ Remove non-value added work
̶ Use technology to help them be more effective

Dr. Mizanur Rahman @ Dhaka University

Strategy to Adopt to Improve Operational
Performance

• Use ‘Omni-channel’ strategy

̶ Ensure seamless experience

• Customer facing policies

̶ Return policies, payment Methods, store hours

• Allocate Capital wisely

̶ Disciplined capital allocation process
Idea Evaluate Allocate
Generation ROIC Capital

Dr. Mizanur Rahman @ Dhaka University

 Thank You!

Dr. Mizanur Rahman @ Dhaka University