IMRA STUDY: HUNT FOR NEW PROFITS
Byline: Valerie Seckler
NEW YORK — The world’s 25 largest chains are seeing their sales grow at an average of 8.7 percent annually — about 45 percent faster than all retailers — and that pace is driving the industry to develop a new profit structure.
That is a key finding of “The Mass Retailer in Your Future,” a newly completed study conducted by Management Ventures Inc., a management consulting firm, for the International Mass Retail Association.
“If current trends continue, the top 200 retailers in the world will represent 30 percent of all measured retail sales by 2005,” projected Daniel W. O’Connor, president of MVI. “This trend is visible in many developed markets and is beginning to emerge in developing countries.”
Sales are growing at an average of 8.13 percent annually among the top 100 chains and 7.4 percent for the second 100, compared with 6 percent for all retail, O’Connor said, in presenting his study at IMRA’s recent convention.
“The real action is coming from the most global retailers, those with operations on three or more continents, in four or more countries,” O’Connor reported. “Since 1994, their volume has grown by an average of about 11 percent a year,” he said of the group that includes Wal-Mart Stores, Metro, Carrefour, Auchan, Ikea, Office Depot and Toys ‘R’ Us.
As a result, O’Connor forecast the most successful retailers in the 21st century will be large-scale, global enterprises that do business in multiple formats, including nonstore channels such as catalogs and electronic trade.
With fewer, bigger companies battling for a larger piece of the global pie, O’Connor said, retailers will be compelled to develop revenue streams that are more profitable than their merchandise margins, which he expects to come under increasing pressure with the stiffening competition worldwide.
Thus, O’Connor told merchants to cultivate new sources of profit, even as they strive to maximize their merchandise margins.
“In order to meet the ongoing pressure for profitable growth, retailers will need to create multitiered profit models,” O’Connor advised. “Building merchandise margins will still be a key, but they will represent a decreasing portion of profit growth.
“Earnings growth increasingly will come from two [other] areas: services and New Age profit centers,” he forecast.
Healthy revenue streams can flow from services such as membership clubs; departments leased to optical shops, travel agencies and business centers, and service contracts for, say, painting or gardening work, O’Connor said.
New Age profit centers, he explained, include the expansion of financial margins, earned through improved management of cash, inventories and credit operations, as well as the vertical integration of banking, insurance, real estate and travel businesses into the retailer’s own business.
“Where regulation allows, retailers are entering consumer banking, providing deposit, checking, mortgages and other bank products,” O’Connor pointed out. “They are entering into the insurance business too, and travel services are also being expanded.”
According to O’Connor’s study, 36 of the top 100 chains offer travel services, 25 market insurance and 17 percent provide consumer banking.
“About 60 percent of mass chains have private label or co-branded credit cards, and the trend to adapt them is accelerating,” the consultant noted. “On average, 36 percent of their sales are being paid for with a card.”
In addition, 53 of the 100 largest retailers have a loyalty program that mines credit-card data from their best customers, whether in a specific area, such as baby merchandise, or in a broad-based rewards program.
Over the next few years, O’Connor predicted, retailers will add services like these at a faster pace as they aim to offset the profit pressure wrought by continuing consolidation.
The 200 largest chains captured 24 percent, or $1.7 trillion, of $7.1 trillion in global retail sales in 1997, excluding restaurants and automotive businesses, O’Connor related. They controlled 32 percent of the volume in the U.S.; 36 percent in Canada; 12 percent in Europe, and 7 percent in Mexico.
The top 200 racked up those results in nearly 260,000 stores, in 70 countries. Of course, their presence is strongest in developed regions such as North America, where they snagged 43 percent of the market share in 1997; Northern Europe, 35 percent, and Asia, 14 percent.
“We believe that more and more consumers will realize the benefits of shopping at large-scale retailers,” O’Connor projected. “It seems that the larger the retailer, the faster the growth rate.”
Indeed, the top 100 chains account for more than 80 percent, or $1.36 trillion, of the $1.7 trillion in sales produced last year by the top 200, which does not include restaurants or automotive businesses.
The 100 largest achieved that dominance by notching annual sales that averaged $14 billion in 1997, versus $2.5 billion among the second hundred.
One strategy setting the top 100 apart from the pack, O’Connor observed, is their growing adaptation of multiple formats, including a direct channel such as a catalog, a telemarketing program, or e-commerce. It’s a path that most other retailers will need to pursue to remain competitive, he contended.
Currently, 20 of 100 largest chains are operating more than three retail concepts, and 42 have two or three formats, according to O’Connor’s research.
Discount stores, department stores, hypermarkets and supermarkets are the formats that have been adapted globally with the greatest success, O’Connor noted. Drugstores, convenience stores, category-dominant chains and membership clubs have been trickier to transfer.
Twenty-six of the top 100 retailers offer one or more catalogs, and 95 have Web sites, but only 40 of them are using the Net to sell goods and services.
“Retailers have to develop into more effective marketers, not just merchants,” O’Connor maintained. “Wedding clubs, store credit cards, Web sites and other proprietary services are helping them to do so.
“One implication,” he added, “is that retailers will begin to emerge as global brands.”