Retail Sales: Is SSS a Failed Metric?
Board: Berkshire Hathaway
Sales notes –
Now that we’re largely past the holiday selling season, we’re going to start seeing all kinds of retail sales commentary. As usual, we're going to see headlines and discussions highlighting same store sales.
As I’ve said probably too often, I’m not a fan of the same store sales measurement.
There’s no accounting or industry standard for reporting ‘SSS’, and we see things we might consider misleading. For example, Target pretty much stopped opening new stores in 2010 and 2011, and instead redirected equivalent capex to extensive ‘remodeling’. They remodeled half of their stores, closing less-productive areas like garden centers and converting the square footage to high-volume categories like groceries. They include these remodels seamlessly as 'same store', and the (expensive to procure) increases look impressive.
Retailers have been ramping up their internet businesses, and some but not all include those internet sales dollars as 'same store' in their reported percentage increases. Kohl’s is a good example. Further, these reported increases are just snapshots in time, without perspective.
That aside, looking at these coming releases, we should expect to see some sales boost this year from many retailers for two factors – inflation (cotton products, food, etc); plus a helpful calendar (last year Christmas fell on the Saturday, this year on the Sunday, for an ‘extra shopping day’ – that Saturday – plus Monday off, for many). We should expect, and not be surprised by, some bump.
In retail executive offices, surprisingly little attention is paid internally to ‘same store sales’ per se. Retail executives are fairly obsessed with other sales metrics, however, including ‘sales per square foot', and derivatives such as gross margin per square foot, and such.
From a retail management point of view, we really do want to focus on store performance on the basis of store productivity – not only in comparing stores, but in looking at the detail behind that, by merchandise category. We can get a good idea as to under-performing stores, and the relative performance of categories within the stores.
Every retail CEO I’ve worked with has focused on sales per square foot productivity. High-productivity offerings like cosmetics get prime space, while less productive offerings go to the back, upstairs, or out. Target’s extensive remodeling is a good example, where the company focused on improving business through the space assignments and allocation.
As bystanders we don’t have access to the information we’d need for this kind of analytical work, but at least we can look at sales per square foot productivity overall. When we see SSS now, we can go a step further and try to put that in some perspective versus peers and all. [As with all measurements, we have to be judicious - for example, we have to temper comparisons of expensive mall locations with third-tier free-standing locations. And we are still just looking at sales].
Here is some top-level sales per square foot data for some major retailers. As with SSS, there’s no reporting standard – some retailers use ‘selling’ square footage, some ‘gross’ square footage (the entire store) as a basis. Both denominators have their applications, but for comparison purposes here we're looking at ‘gross’ square foot.
[See post for table.]
Dollar Stores –
This gives us a lead-in to a discussion of dollar stores, relevant with Berkshire’s recent position in Dollar General.
Here is an interesting white paper on dollar stores, from a couple of weeks ago:
We’ve all seen commentary on how the dollar stores have been supposedly making inroads into Walmart, Target, etc. This paper picks up on that theme a bit.
It may be that the dollar store impact impact on Walmart is not terribly consequential, though. [As an aside, I’ve always admired Walmart for its ability to pick its battles, focusing on the big pay-offs – recently taking on global #2 Carrefour, which it has been thrashing overseas, and before that, the 'category killers' that had been dominating the domestic market).
Perhaps more likely, dollar stores have been taking business from the myriad of convenience-type stores that used to be just about everywhere, as well as from second-tier variety stores, discounters, and drug stores. The dollar stores' big target now is may be the extensive, pervasive Walgreens and CVS chains.
The linked paper points out that the big three dollar stores have about 20,000 locations overall, and the big three drug stores also have 20,000 locations. Store numbers, store sizes, and convenience comparisons aside, the two groups seem to be on a head-on collision course, increasingly going after customers and markets with the same types of products.
I don’t think it’s coincidence that KKR packed Dollar General management with former drug store chain executives -- or that they’ve secured the rights to the Rexall brand name. Watch a Dollar General check-out line and since KKR there had been an increasing emphasis on cigarettes, lottery tickets, and typical convenience store offerings. They seem to be evolving even more towards Walgreen/CVS type products and stores - not a direct line-up, but a fair amount of overlap.
How much potential is there? Walgreen and CVS each crank out an average of about $650/sf of sales in their thousands of locations – but two-thirds of that is prescription drug sales. Back that business out, along with some estimation of the pharmacy space, and we’re looking at somewhere in the vicinity of $300/sf of non-prescription sales productivity – about double the dollar stores’.
Walgreens/CVS items are marked up a bit more, so on a per-unit basis they are just a little closer, but there’s still a substantial gap. I suspect that we’ll see the dollar stores increasingly try to capture that Walgreen/CVS business at highly discounted pricing. If anything we’ll see some increasing pressure on the drug store chains’ ancillary business.
A year ago I would have written off Family Dollar – the stores were clearly mismanaged and I didn’t think management would ever be up to it (poor performance, insularity, nepotism). With the beginning of a shake-up there, there’s the potential that they also could see a DG-type renaissance, though probably with a different product focus (still carrying clothing and such).
Back to Dollar General – while we might see the potential and understand Berkshire’s interest, we might keep in mind that KKR has already picked the really low-hanging fruit – in terms of both performance improvement and business value. They made the obvious fixes (merchandising, store hours, etc) and while DG might be terrific going forward, in getting into it now we're buying KKR’s re-engineered and repackaged product, essentially from KKR.
In any event, it will be interesting to see how this shapes up – dollar stores vs the convenience and drug stores. Walgreens and CVS have dominated their market segment so far, have had a good thing, and have demonstrated that they are no patsies. The dollar stores seem to be zeroing in, however.