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Call it the $3 billion bonus.

When it comes to leveraging costs in retailing, bigger is almost always better. Having sales of $1 billion helps, but the competitive advantages really kicks in at $3 billion. But there are exceptions to the size rule, such as executive compensation.

One of the greatest competitive disadvantages facing the middle-market retailer is an inability to use size to lower relative expenses. In economics, it’s known as leveraging economies of scale. The larger a company grows, the more it can cut costs because it gains efficiencies in a host of ways. Transportation costs, for example, come down dramatically as the volume of shipments goes up. Having more employees leads to job specialization, which allows for greater worker productivity. And buying most anything in bulk—from printer paper to bottled water for the office—saves money.

Looking at economies of scale in the retail apparel business, a WWD survey of three-year average selling, general and administrative expenses illustrates that the biggest retailers enjoyed an enormous cost advantage over the smallest. Indeed, companies with more than $20 billion in annual sales had an average SG&A ratio almost 800 basis points lower than retailers with less than $500 million in annual revenue.

Moreover, the cost benefits increased dramatically at the $1 billion sales mark, and especially once a retailer surpassed $3 billion in annual volume. Companies with sales of $500 million to $1 billion had an average SG&A advantage of 240 basis points over their smallest competitors, while companies in the $1 billion to $3 billion range posted an average SG&A 280 basis points lower. Pass that $3 billion point, and retailers’ average SG&A stood at just 23.8 percent of sales.

In an industry where SG&A expense of 30 percent is considered good, that is extraordinary. The $3 billion-plus retailers not only beat the rule-of-thumb figure by a whopping 620 basis points, but also came in far below the overall industry average and median of 27.8 and 26.6, respectively.

Emanuel Weintraub, president and chief executive officer of the firm that bears his name, said Wall Street is obsessed over comparable-store sales when they should be looking at operating costs. “Nobody wants to talk about the nitty gritty, yet there are successes when a company focuses on it,” he said. “Why is Wal-Mart successful? Because they understand that If you’re going to be a value provider you have to cut out anything that’s not absolutely pertaining to that product.”

This story first appeared in the August 16, 2004 issue of WWD.  Subscribe Today.

For the retailer doing less than $1 billion in business, the picture is pretty bleak. But happily for them there are intriguing and instructive exceptions to the rule. Of the 10 companies with the lowest SG&A, four had three-year average sales of less than $1 billion. Stage Stores, a department store, emerged from bankruptcy only three years ago and presumably has learned to live on a financial diet of rice and beans.

But the remaining three — Aeropostale, Buckle and Deb Shops — are all mall-based specialty retailers, which is telling. The specialty concept is scalable. There are also comparatively less store design costs. The other benefit of being mall based mall is more predictable operating costs. There’s also no snowy sidewalk to shovel.

Another important lesson mid-market retailers can learn from the exceptions to the size rule is the effect of executive compensation on SG&A. For the economy as a whole, labor accounts for about a third of total consolidated costs, so it’s no surprise that companies look to pare their wages and workforces when they need to cut expenses. But sometimes it’s the best-paid employees — the executive management team — that can cause SG&A to balloon.

Look at Neiman Marcus Group and Barneys New York, for example. Neiman’s had much larger sales than Barneys, so it follows that it would have a smaller expense ratio. The problem is that Barneys’ ratio is so outsized, it can’t be explained entirely by having a comparatively small business. In fact, at 40.3 percent, Barneys SG&A is the second-highest of the companies tracked by WWD. The difference is the way Neiman’s and Barneys compensate their top executives. Based on a three-year average as a percentage of sales, Barneys paid its top executives more than seven times as much cash in salary and bonuses as Neiman’s did.

Differences in compensation also partly explain the cost difference between May Co. and Federated, which have commensurate sales levels. Yet, May’s laudably meager SG&A of 20.4 percent was more than 1,000 basis points lower than Federated’s, and its managements’ pay was lower, too. Over the last three years, May’s total average executive compensation as a percent of sales was half that of its major competitor at 0.04 versus 0.08.

Mid-market retailers should take heart in the data. They can keep costs down even when operating on a much smaller sales level. Although the rule of economies of scale will tend to reduce expenses and boost profits organically, it is by no means a gold medal in retailing. At best, it offers a shot at the bronze.

Economies of Scale
Retailer
3-Year Average
Sales (000s)
3-Year Average
SG&A as % of Sales
GREATER THAN $20 BILLION
Wal-Mart Stores Inc.
$241,672,667
16.80%
Target Corp.
$43,989,333
23.10%
Sears, Roebuck & Co.
$41,189,333
22.10%
J.C. Penney Co. Inc.
$27,379,000
28.70%
AVERAGE
22.70%
 
$10 BILLION TO $20 BILLION
Federated Department Stores Inc.
$15,450,000
31.20%
Gap Inc.
$14,718,861
26.80%
May Department Stores Co.
$13,669,667
20.40%
TJX Cos. Inc.
$12,006,048
16.00%
AVERAGE
23.60%
 
$5 BILLION TO $10 BILLION
Kohl’s Corp.
$8,963,678
20.20%
Limited Brands Inc.
$8,914,000
26.20%
Dillard’s Inc.
$8,161,982
27.20%
Nordstrom Inc.
$6,033,626
30.30%
Saks Inc.
$6,012,248
29.20%
AVERAGE
26.60%
 
$1 BILLION TO $5 BILLION
Ross Stores Inc.
$3,479,509
17.50%
ShopKo Stores Inc.
$3,278,902
19.30%
Neiman Marcus Group Inc.
$3,020,663
26.20%
Burlington Coat Factory Warehouse Inc.
$2,586,047
31.20%
Retail Ventures Inc.
$2,442,934
37.80%
Charming Shoppes Inc.
$2,230,644
24.60%
Talbots Inc.
$1,610,726
27.40%
Abercrombie & Fitch Co.
$1,556,140
21.70%
American Eagle Outfitters Inc.
$1,451,669
24.50%
Ann Taylor Stores Inc.
$1,422,749
44.40%
Stein Mart Inc.
$1,361,432
23.90%
Goody’s Family Clothing Inc.
$1,204,328
27.30%
Claire’s Stores Inc.
$1,017,703
35.40%
AVERAGE
27.80%
 
$500 MILLION TO $1 BILLION
Pacific Sunwear of California Inc.
$857,176
24.10%
Bon-Ton Stores Inc.
$790,099
30.40%
Stage Stores Inc.
$747,234
20.50%
J. Crew Group Inc.
$744,200
39.40%
Cato Corp.
$733,752
23.00%
Dress Barn Inc.
$706,422
26.40%
Gottschalks Inc.
$698,084
30.90%
Guess Inc.
$632,448
31.80%
Too Inc.
$616,275
25.20%
Wilsons the Leather Experts Inc.
$604,218
27.90%
Wet Seal Inc.
$576,016
28.20%
Chico’s FAS Inc.
$559,231
38.00%
Aeropostale Inc.
$530,180
20.30%
AVERAGE
28.20%
 
LESS THAN $500 MILLION
Coldwater Creek Inc.
$485,347
37.60%
Hot Topic Inc.
$450,461
25.70%
Mothers Work Inc.
$444,637
45.70%
Urban Outfitters Inc.
$440,024
24.80%
United Retail Group Inc.
$418,423
24.50%
Buckle Inc.
$403,839
21.50%
Barneys New York Inc.
$388,003
40.30%
J. Jill Group Inc.
$337,174
28.30%
Christopher & Banks Corp.
$335,111
22.60%
Bebe Stores Inc.
$310,270
33.90%
Deb Shops Inc.
$307,983
21.50%
Syms Corp.
$281,489
37.10%
Cache Inc.
$198,526
34.70%
 
AVERAGE
30.60%
OVERALL AVERAGE
27.80%
OVERALL MEDIAN
26.60%
Source: Company Reports

Ten Best SG&A Ratios
Company
3-Year Average
Sales (000s)
3-Year Average
SG & A as % of Sales
TJX Cos. Inc.
$12,006,048
16.00%
Wal-Mart Stores Inc.
$241,672,667
16.80%
Ross Stores Inc.
$3,479,509
17.50%
ShopKo Stores Inc.
$3,278,902
19.30%
Kohl’s Corp.
$8,963,678
20.20%
Aeropostale Inc.
$530,180
20.30%
May Department Stores Co.
$13,669,667
20.40%
Stage Stores Inc.
$747,234
20.50%
Buckle Inc.
$403,839
21.50%
Deb Shops Inc.
$307,983
21.50%
Source: Company Reports

Select SG&A Industry Comparison
Industry
Median SG&A
as % Sales
Oil & Gas Producers, Refiners & Marketers
3.30%
Real Estate
3.80%
Healthcare Providers
7.70%
Food Retailers & Wholesalers
20.80%
Advertising & Media
24.30%
Computer Systems & Peripherals
25.10%
Retail Apparel
26.60%
Beverages
30.80%
Drugs & Biotechnology
40.90%
Cosmetics & Personal Care
43.60%
Source: CFO Magazine, WWD