The New Rules of Retail: Competing in the World's Toughest Marketplace by Robin Lewis & Michael Dart

Author:Robin Lewis & Michael Dart [Lewis, Robin]
Language: eng
Format: mobi
Publisher: Palgrave Macmillan
Published: 2010-12-06T14:00:00+00:00

Figure 7.2: The 1st quartile of stores accounts for 73 percent change in market cap from 2002 to 2010

Our research found that companies exercising maximum and/or total control over their entire value chains created significantly higher economic returns than those that did not. In our analysis the correlation between changes in market capitalization and the retailer’s score was both statistically significant and explained close to 40 percent of the change in market value.

Between 2002 and 2010, in our sample companies, the first quartile was responsible for 73 percent of the total economic value created by the sample. This was particularly impressive since they represented only just over one-third of the actual market value of the sample at the beginning of 2002.

Additionally, during the recession, ca. 2007, 25 percent of the bottom quartile went bankrupt. In no other group did any company fail. The data suggest that to thrive or even survive requires achieving control of the value chain. Accordingly, we predict that over 50 percent of retailers in our sample will eventually fail because they are not moving fast enough toward this goal. The bottom half of our sample is full of likely candidates.

Interestingly, in our first quartile there are a mix of companies that we believe also excel in preemptive distribution and making neurological connections with their consumers. However, we believe that there are others that are in the early stages of evolving to a stronger execution on those dimensions. For some (most notably Aeropostale), a focus on operational excellence enabled them to accelerate past their competitors during this period, opening the door to a substantially enhanced consumer connection.

Moreover, because this study was conducted in 2007, by 2010 we could see how the companies performed through the Great Recession. Not surprisingly, those retailers in the bottom half of the sample found that they were still unable to create any economic value, while those in the top group remained the largest creators of economic value (albeit somewhat diminished). Obviously, all companies lost value during the downturn. However, even as consumers’ priorities shifted during the recession (for example, away from aspirational luxury), we still found that retailers with high scores on value-chain control outperformed others, regardless of sector.

Also not surprising, though sad, was the discovery that the companies that had disappeared by 2010 (for example, Circuit City, CSK Auto, etc.) had been rated in the bottom quartile in 2007. In no other quartile had this happened. While the reasons for each company’s demise are manifold and various, it’s a strong possibility that if they had implemented a stronger, more controlled value chain, they might have survived.

In summary, while control of the value chain does not necessarily guarantee perpetual success, (e.g., Gap, Starbucks and others), inability to achieve it will guarantee failure.

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