Stop Chasing the Wrong Kind of Growth

Marshall Fisher

Vishal Gaur

Herb Kleinberger

<article-ideainbrief class="article-ideainbrief">
 <h4 class="ideainbrief-title">In Brief</h4>
 <div class="ideainbrief-contents">
  <h5>The Problem</h5>
  <p>In pursuit of double-digit revenue growth, many retailers relentlessly open new stores, even when doing so destroys the profitability of their businesses.</p>
  <h5>The Cause</h5>
  <p>This addiction is fueled by Wall Street and a capitalist culture that’s obsessed with growth. It’s hard to kick, primarily because companies don’t know when or how to switch to a slow-growth strategy.</p>
  <h5>The Solution</h5>
  <p>Mature companies should rely on a strategy that focuses on growing revenues of existing stores faster than expenses.</p>
 </div>
</article-ideainbrief><p>Companies in all industries eventually see their revenue growth slow. Retailers are no exception. Fickle consumers, intense competition, changing markets, and the rapid encroachment of online retailing all combine to exert pressure on the top line. The retail graveyard is filled with chains such as Circuit City, Austin Reed, Linens ’n Things, Loehmann’s, British Home Stores, RadioShack, and the Sports Authority—that expanded rapidly and then, faced with declining growth, couldn’t find ways to change course.</p>

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<p>In pursuit of double-digit top-line growth, many retailers relentlessly open new stores, even when doing so destroys the profitability of their businesses. This addiction is fueled by Wall Street and a capitalist culture that&#8217;s obsessed with growth. It&#8217;s hard to kick, primarily because companies don&#8217;t know when or how to turn off the growth machine&#8212;or what to replace it with.</p>
<p>To explore the problem, the authors studied the financial data of 37 U.S. retailers with recent sales of at least $1 billion whose growth rate had faltered. They found that the less successful retailers had continued to chase growth by opening new stores far past the point of diminishing returns. By contrast, the more successful retailers had drastically curtailed expansion and instead relied on operational improvements at their existing stores to drive additional sales. This allowed them to increase revenues faster than expenses, which had a powerful positive impact on earnings.</p>
<p>This article lays out a framework for determining when to switch to a low-growth strategy and how to put it into practice. If retailers execute well, they can stay in the maturity stage of the life cycle for a very long time, forestalling decline.</p>

Curing the Addiction to Growth

In pursuit of double-digit top-line growth, many retailers relentlessly open new stores, even when doing so destroys the profitability of their businesses. This addiction is fueled by Wall Street and a capitalist culture that’s obsessed with growth. It’s hard to kick, primarily because companies don’t know when or how to turn off the growth machine—or what to replace it with. To explore the problem, the authors studied the financial data of 37 U.S. retailers with recent sales of at least $1 billion whose growth rate had faltered. They found that the less successful retailers had continued to chase growth by opening new stores far past the point of diminishing returns. By contrast, the more successful retailers had drastically curtailed expansion and instead relied on operational improvements at their existing stores to drive additional sales. This allowed them to increase revenues faster than expenses, which had a powerful positive impact on earnings. This article lays out a framework for determining when to switch to a low-growth strategy and how to put it into practice. If retailers execute well, they can stay in the maturity stage of the life cycle for a very long time, forestalling decline.

Curing the Addiction to Growth

Summary.

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