Death by tools and metrics #3: Same store sales ~ Brand Mix

Wednesday, January 30, 2008

Death by tools and metrics #3: Same store sales

This is the third in a series of posts about the dangers of blind allegiance to tools and metrics. In the wrong hands, used for the wrong purposes, they can be killers.

Today's metric: Same store sales. This metric is used in the retail industry to look at the underlying performance of existing stores by separating out revenue growth from new stores. This makes sure that new outlet sales don't mask weakness in performance from stores that are already open. Its value is that it puts the focus squarely on a company's ability to increase demand for its products, a less expensive option than opening new stores and more indicative of underlying strength. Over time, same store sales has become the all-important metric for analysts that track the industry. One bad month reported, one share price drop more or less certain.

The hidden dangers? Well, they come if retailers are so focused on these numbers to protect their share price and meet Wall Street expectations that they start making poor strategic choices. Problems can come from bad decisions made against either of the two components that make up same store sales number: price or store traffic.

1) Price: The introduction of new, higher priced items will drive up same store sales even if store traffic remains the same. Often nothing wrong with that. But not if a company drifts away from its core values. As an example, The Gap started introducing more and more expensive items in the 90s and eventually lost touch with its consumer base and what it stood for. Maybe another example is Starbucks that's been introducing all sorts of high-priced paraphernalia, some of it (e.g. music) well beyond the core business of coffee. At the very least, these items complicate what the Starbucks brand stands for.

2) Store traffic: The other side of the coin (and the more common) is increasing sales by cutting prices. As long as volume goes up enough to cover the price discounts, same store sales will continue to increase. The problem is that this is often a short term fix that will run out of steam. A recent example is Bed Bath & Beyond. Its same store sales were propped up by discounts for a while but, in 2007, it had to warn that its earnings would be lower than expected. All the while its same store sales had been increasing, the quality of its sales had been falling. When a company goes down this path to increase its store traffic, it can find the road back to health a very long haul since its brand may well be indelibly marked and cheapened.

As with the previous posts in this series, I am not advocating that this metric is abandoned. Rather I'm proposing that the limits and blind spots of all tools and metrics are better recognized. That will help protect companies from being run by their metrics rather than them using metrics to run their business better.

Earlier "Death by Metric " posts:
1) Discounted cash flow
2) The P&L

1 comment:

Jonathan Salem Baskin said...

Interesting post...and thanks for visiting DIM BULB and reading mine on the same subject (http://dimbulb.typepad.com/my_weblog/2008/03/a-branding-metr.html).

We do come at the subject from two different perspectives; you're concerned that marketers not lose sight of the brand because they're focused on short-term tactics to drive month-over-month sales, and I'm worried that marketers who focus on long-term branding make decisions that have little to no relevance to sales whatsoever.

Retailers have three variables at their disposal to drive sales: get customers to visit more often, get them to buy more when they're in the store, and attract net-new customers to do one or both of the first two things.

Doing any of the above is a real-time activity; there's no 'future' wherein these behaviors will somehow be automatic or reliable if left alone. The transactions that drive retailing are an endless series of moments, each of which is an 'event' that the business needs to prompt and support.

What is 'brand' if it's not inexorably intertwined with the behaviors that constitute these moments in the life of the business?

So is a metric that measures these actions somehow short-sighted?

If businesses cater to it poorly, or have no plan to deliver it over time, then it's the businesses themselves that are short-sighted, not the metric. I'd argue that any business that complains about attending to (and reporting on) such attention to the fundamental drivers of its bottom-line -- visits and purchases -- is probably focused on the wrong things.

There's no 'tomorrow' in retailing, or any other industry. There never was, really, other than as a comfortable abstraction that allowed for bad short-term decisions because they somehow supported an illusory long-term perspective on the brand.

What all businesses probably need to address is an endless list of tomorrows...a list that gets longer every 24-hours. Consumers have lived with this list in their proverbial pockets all along. "Will I go to this or that store today, and what will I do?" are real decisions made daily, not abstractions of thought or intent.

Anyway, my prediction is that we're going to see more tools like comp store sales getting utilized to help envision and then track brands.

I appreciate your riff on this, and will make a point of visiting your blog again.

 
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