Study: Retailers challenged by higher sales/lower profitability conundrum
An in-depth analysis of fourth-quarter 2017 sales results revealed that despite increasing sales, many retailers still face declining gross margin percentages and lower overall EBITDA.
According to a report by Berkeley Research Group’s retail improvement practice, while fourth-quarter sales outperformed retailers’ expectations, gross margin percentages declined.
“Recent strength in year-over-year sales increases is not surprising,” said managing director Keith Jelinek, co-leader of BRG’s retail performance improvement practice. “We questioned whether the sales increases are actually driving increased profitability.”
To gauge the impact of promotional activity, which was high during the holiday season, BRG examined the financial results of seventy-seven large and medium-sized public U.S. retailers across eighteen retail channels. They found that while total sales increased 5.5% and gross margin dollars increased 3.3%, gross margin rate declined by 55 basis points — high promotional activity had its expected impact, especially on the bottom line.
The BRG analysis also shows that the top-line growth did not translate to increases in EBITDA improvements in all channels. In addition to gross margin softness due to promotional activity, they found that retailers continue to face higher cost to serve in the highly competitive retail environment.
The authors believe that the higher cost comes from increased transportation costs, wage pressures in a tighter labor market and greater cost of complexity from delivering omnichannel initiatives and other efforts to grow the business.
“In today’s fluid and competitive consumer environment, retailers still believe they have to entice consumers with aggressive prices and promotional discounts — and this may be the case,” said managing director Rick Maicki, co-leader of BRG’s retail performance improvement practice. “But based on our examination of Q4 results, the much-heralded sales bump over the holidays failed to generate added profitability for retail in aggregate and yielded a profit increase for only a subset of retailers.”
According to the authors, despite recent green shoots, retail remains a stressed industry. Companies in all retail categories have undergone a wave of disruption, and over the last few years some have fallen short in addressing challenges. Those that remain will face more tests, but opportunities exist for those that can piece together the puzzle. They say it will require a strategic and coordinated effort across the operation, as well as flexibility in addressing both short- and long-term challenges.
“Attracting new customers and keeping loyal shoppers ‘in the fold’ is never a fait accompli,” said managing director Rich Vitaro, co-leader of BRG’s retail performance improvement practice. “We have identified six strategies that help retailers profitably grow the business while maintaining a relentless focus on cost and complexity reduction.”
The full report is available here.
According to a report by Berkeley Research Group’s retail improvement practice, while fourth-quarter sales outperformed retailers’ expectations, gross margin percentages declined.
“Recent strength in year-over-year sales increases is not surprising,” said managing director Keith Jelinek, co-leader of BRG’s retail performance improvement practice. “We questioned whether the sales increases are actually driving increased profitability.”
To gauge the impact of promotional activity, which was high during the holiday season, BRG examined the financial results of seventy-seven large and medium-sized public U.S. retailers across eighteen retail channels. They found that while total sales increased 5.5% and gross margin dollars increased 3.3%, gross margin rate declined by 55 basis points — high promotional activity had its expected impact, especially on the bottom line.
The BRG analysis also shows that the top-line growth did not translate to increases in EBITDA improvements in all channels. In addition to gross margin softness due to promotional activity, they found that retailers continue to face higher cost to serve in the highly competitive retail environment.
The authors believe that the higher cost comes from increased transportation costs, wage pressures in a tighter labor market and greater cost of complexity from delivering omnichannel initiatives and other efforts to grow the business.
“In today’s fluid and competitive consumer environment, retailers still believe they have to entice consumers with aggressive prices and promotional discounts — and this may be the case,” said managing director Rick Maicki, co-leader of BRG’s retail performance improvement practice. “But based on our examination of Q4 results, the much-heralded sales bump over the holidays failed to generate added profitability for retail in aggregate and yielded a profit increase for only a subset of retailers.”
According to the authors, despite recent green shoots, retail remains a stressed industry. Companies in all retail categories have undergone a wave of disruption, and over the last few years some have fallen short in addressing challenges. Those that remain will face more tests, but opportunities exist for those that can piece together the puzzle. They say it will require a strategic and coordinated effort across the operation, as well as flexibility in addressing both short- and long-term challenges.
“Attracting new customers and keeping loyal shoppers ‘in the fold’ is never a fait accompli,” said managing director Rich Vitaro, co-leader of BRG’s retail performance improvement practice. “We have identified six strategies that help retailers profitably grow the business while maintaining a relentless focus on cost and complexity reduction.”
The full report is available here.