Consensus Advisors‘ Managing Director Doug Stebbins joins me today for an interview about the retail industry.  Consensus Advisors is a boutique investment banking and financial advisory firm which focuses on retail and consumer products.

Doug head up the Valuation, Benchmarking and Analytical Services Group and created the Retailer Health Ratings™ which I’ve previously posted about.  Doug comes from a background with various financial institutions so he brings a great business and quantitative perspective to the retail industry.

I’m sure you’ll get a lot out of his remarks about:

• the delicate balance of managing inventory and meeting demand
• how retailers can grow by working “the fringe,” and
• the importance of a strong brand to fuel e-commerce growth

Check out Consensus Advisors’ website and contact Doug at DStebbins AT ConsensusAdvisors DOT com  if you would like more information.

other interviews:

• john gerzema on how to connect with today’s consumer
• dick lynch on the turnaround at Popeye’s Louisiana Kitchen
• michael tchong on trends to pay attention to

Consensus Advisors just released their 2009-2010 Retailer Health Ratings (RHRs) report.  The RHRs measure and compare retailers over a five-year period on:

• healthy growth
• asset utilization
• pricing power
• balance sheet strength

The report and webinar were really interesting and so I thought I’d share some of the insights and my reactions.

1.    weaknesses of comparable store sales as a measure of retail performance

I wrote a post about this awhile ago and so I was pleased to discover Consensus shares my concern with comp store sales, which indicate the growth or decline of sales of stores that have been open for a year or more compared to the same period the year before.

Although they are the primary means of reporting retail results, “’Comps’ are short-term focused and potentially misleading when viewed out of context as they can be driven by unhealthy margins, inventory levels, advertising spend and consumer credit practices. Comps also say nothing about a retailer’s financial leverage, brand strength or ability to manage efficiently the assets on its balance sheet.”

The RHRs, in contrast, provide a more balanced and longer-term evaluation of a retailers’ performance.  Consensus uses 15 different measurements and weights them according to their correlation to the retailers’ results on commonly used financial metrics such as return on assets, net income margin, total investment return and return on invested capital.

For example, they don’t just look at the sales growth of a retailer – they also take into account sales volatility, cannibalization, and sales momentum.  And then they adjust that result to reflect operating profitability.  With this more detailed view, I find the strengths and weaknesses of a company relative to its competitors become much clearer.

2.    pricing power as a measure of brand strength

By looking at change in gross margin as well as gross margin volatility, Consensus claims they assess the strength of a company’s brand.  They explain, “As a brand distinguishes itself first from commodity competitors and then from branded competitors, its desirability to its customers can command a price premium.  Sometimes this premium is reflected in an increased price to the consumer; sometimes it is reflected in a stable selling price which does not go down as costs are reduced. Healthy companies enjoy brands that command steadily improving gross margins.”

I agree pricing power generally reflects brand strength from the consumer point of view – I’ve made this point myself.  But I wonder about how the Free economy changes this.

As Chris Anderson points out, “Virtually everything Google does is free to consumers” and yet one could argue that Google is one of the strongest brands today.  (BusinessWeek/Interbrand’s 2009 Best Global Brands report ranked Google as the #7 brand in the world and estimated its brand value at nearly $32BB — an increase of 25% from the prior year.)

For free offerings, user preference, perceived differentiation, esteem, etc. are probably the best measures of brand strength – and publicly available financial metrics such as the ones tracked by the RHRs may be limited in their ability to fully or accurately reflect brand strength.

3.    brand focus vs. product focus

Pointing to the recent struggles of youth apparel brands Pacific Sunwear, Hot Topic, and Zumiez, Michael O’Hara, Chief Executive Officer of Consensus, remarked about the risk associated with too specific of a focus.  After I submitted a question about this, he clarified his point saying that retailers need to have a flexible store concept that gives them the ability to migrate away from something that once was not but is no longer.

“Pac Sun,” he explained, “will always have to be about the beach, but to the extent that the beach goes out of style, then I wouldn’t want to be Pac Sun.”  He contrasted this with lululemon athletica which he perceives is more flexible because they’re associated with exceptionally high quality, high performance fashion apparel.  And so while right now they are into yoga apparel, he argues, if women suddenly got into ice hockey for example (but let’s hope they never do), lululemon can go there too.

While I don’t necessarily agree with him because I believe yoga defines lululemon, I do think he makes an important distinction.  In my mind the difference between these two examples is brand vs. product.   If your brand is tied to too narrow of a product assortment, it’s harder to evolve your offering as trends come and go.  But if your brand is defined more by values and personality attributes, you have more flexibility.

This is a particularly important point for apparel retailers where product demand changes so quickly.  Brand focus is indeed important but so is the ability to shift product focus — within the brand context — between categories and types.

There are lots of other juicy insights in the report so I encourage you to take a look (purchase required) or at least download the webinar presentation.

related posts:

• free to be free
• six best practices in retail

Ever since the phrase “you manage what you measure” made its way into the dialogue of corporate America, metrics have played an increasingly important role in the management of businesses.  No one can argue the value of timely, detailed, and accurate measures of performance as assessments of effectiveness and guides for decision-making.  Yet, which metrics are best remains highly debatable.

Lately I’ve been troubled by two metrics.  I’d like to outline my concerns and then hear your feedback, as I’m sure not everyone will agree with them.

First, there’s ROI.  While return-on-investment is a legitimate and helpful metric for evaluating the efficiency of an investment in finance and economics, I’m concerned about it as a method for measuring the effectiveness of many business moves.

I see ROI as a tool for use in the capital budgeting process – leaders must make projections of future rates of return of different projects in order to select which projects to pursue.  It also has value when evaluating marketing outcomes at a high level, comparing, for example, two different product launches by calculating the revenue that each new product generated divided by its respective marketing expenses.

However, I question whether ROI is the best way to measure discrete tactical activities.  Christine Crandell, EVP and CMO of Egenera, explains my concern well in a piece published by CMO.com:

“The problem with ROI is that it forces a myopic view on short-term objectives while disregarding the fact that it is very rare for any single marketing activity to be directly responsible for new net revenue.  The focus on ROI fuels a never-ending debate about spending levels for brand-building activities while disregarding the fact that customers typically buy only after being repeatedly touched by a series of separate and discrete marketing activities.” (emphasis mine)

She points to the current debate about the ROI of social media to show how such a focus can be so misguided. She also suggests an alternative:

“…Replace ROI with benchmarks.  Benchmark marketing’s performance against itself quarter over quarter and year over year.  Benchmark against comparable competitors.   Benchmark the number of leads passed to sales that closed, the average revenue per lead, the percentage of the forecast generated by marketing, the percentage of customers actively engaged in advocacy programs, or the number of lead referrals from industry analysts.  And so on.” (emphasis mine)

This approach makes sense to me, as it focuses metrics on specific measures that can be compared apples-to-apples. And rather than simply offering a referendum on an outcome that happened in the past, it provides more direction for the planning of future strategies and tactics.

ROI also isn’t the right metric for measuring much of the work that brand-building practitioners like myself do. Even the most bottom-line oriented business person would be hard pressed to calculate the ROI of identifying the optimal competitive positioning or implementing a customer experience strategy to increase the consistency of value delivery.  Trying to attach a sales or profit result to changes that have such foundational and broad-sweeping effects would be futile at best, misleading at worst.

That’s not to say that measuring the impact of such initiatives is unimportant.  An evaluation of the value created by them is more fitting.  Last year, I wrote a series on brand value creation which outlines the different outcomes produced by a strong brand, including price premium, business process efficiency, and stakeholder engagement. It’s measurements like these that would be a more accurate and direct reflection of brand-building effectiveness.

The other metric that has me concerned is comp store sales.  Comp store sales, which indicates the growth or decline of sales of stores that have been open for a year or more compared to the same period the year before, is the primary means of reporting retail results.  It’s an important measurement of operational performance because it distinguishes between revenue growth that comes from new stores and growth from improved operations at existing outlets.

Problems arise though because a strong comp store sales result this period may reflect poor performance last period, not necessarily good performance in this one.  No doubt, many retailers’ comp stores sales are going to start looking good later this year as we start rolling over the depths of last year’s recession.

Furthermore, longer quarters and holidays falling in different quarters can have a significant impact on comp store sales.  And higher comp store sales can often be a result of price increases, not unit sales or traffic increases.  That’s why I cringe when I see people placing too much emphasis on monthly or quarterly comp store sales, as they did this past holiday season when repeated reports of increases were released.

Perhaps benchmarks make sense here as well.  The focus on comp store sales seems more appropriate if we use the metric to benchmark one company’s results against its primary competitors and against the industry average.  Instead of reporting comp stores sales as a percentage of growth or loss, perhaps it should be reported as a score relative to an index.

Also looking at trends vs. absolutes is more revealing.  If a company has been experiencing a steady increase in comp store sales over multiple quarters and years, it’s clear that operational improvements — not flukes or fads — are driving the results.  Wide variations from month to month or quarter to quarter, however, indicate a much less stable business.  So perhaps tracking deviations from a mean expected increase would be a meaningful metric.

I don’t mean to make measuring performance more complicated – it just seems the over-reliance on one number, whether it’s ROI or comp store sales, can be dangerous.  And in the end, the point of a metric is not the number itself.  Rather, a good metric is a tool by which future decisions are guided.

So to the adage “you manage what you measure,” I would suggest the following corollary be added: “you manage well what you measure well.”

I’m eager to hear your thoughts on this post. Comments are open.

related posts:

• brand value creation
• stuff that matters