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.”
A Stella McCartney sketch of a custom dress made from protein-based silk in partnership with biotech lab Bolt Threads. The dress will be displayed at The Museum of Modern Art's upcoming design exhibition, "Items: Is Fashion Modern?"