Sales Focus Back in Vogue for Retailers

After years of emphasis on cutting costs, retailers are ready to spend to boost their top line.
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Retailers are shifting their focus away from their cost structure and to their top line as a place to boost profits, according to a recent study by the National Retail Federation and consulting group BearingPoint.

Close to three-quarters of the retail executives surveyed for the study stated that increasing comp-store sales, or sales at stores open for at least a year, was their top priority for 2006.

"This isn't a dramatic change from the results of our study last year, but over the course of the last four years that we've been doing this survey, we've seen a pretty dramatic swing from an emphasis on cost-savings to a focus on the sales side of the equation," says Scott Hardy, managing director with BearingPoint. "The growth message started to emerge last year, and this year, it really picked up steam."

To be sure, keeping costs down is always an important part of any business strategy. In an industry where discount chains that enjoy massive economies of scale -- like

Wal-Mart

(WMT) - Get Report

and

Home Depot

(HD) - Get Report

-- have come to dominate, a low-cost business model is particularly essential to be competitive. Margin expansion remains a top priority at chains like

Office Depot

(ODP) - Get Report

and

Sears Holdings

(SHLD)

.

On the other hand, the rampant obsession with cutting costs out of the system that gripped retailers in 2002 and 2003 has given way to a focus on investing in marketing efforts and "customer experience" enhancements.

"Cost structures had gotten out of line in the retail industry, and everybody was forced to look at their cost-side," says Katherine Mance, vice president with the NRF. "At some point, you get to a place where you have to look at the other side of the business. Now, they're saying, "Well, if we can't cut costs anymore, how can we grow sales and capture market share to boost profits?"

Richard Hastings, a retail analyst with Bernard Sands LLC, says the trend is partly related to technological changes in the industry.

"Technology innovations in software and hardware elevated retailing from an old-economy sector to an ecommerce or new economy model," Hastings said. "As this shift manifests itself, retailers gradually turn away from making system improvements toward investing in stores and using existing resources to tailor the experience for customers."

The shift might not bode well for the multitude of technology vendors showing off their products last week at the NRF's annual convention in New York. The NRF's study showed that outsourcing for information technology systems ranked as the lowest priority for retail executives in growing their market share.

Shoppers, meanwhile, may benefit as chains hire more employees to oversee sales floors and look for new ways to impress them.

At Wal-Mart, the world's largest retailer, same-store sales growth has slowed over recent years to 3.5% in 2005 from 5.2% in 2002 -- a recession year. In its third quarter, profit margins were squeezed by higher costs. The increase was partly due to high gas prices for its shipping fleet, but there were also signs that the retail giant was investing in its public image and sprucing up its stores in order to lure back customers it was losing to

Target

(TGT) - Get Report

and others.

One-fourth of the respondents for the NRF study reported negative growth in comps for 2005. Another fourth of the respondents showed solid growth levels, and about 50% of respondents were stuck in neutral.

"We're seeing that there are clear winners and losers across the industry, so it's really a market share game," Harding says. "It's the guys that are able to think small and understand their customer's expectations at a local level that will do well."

Despite all the price-cutting activity that took place in the recently concluded holiday shopping season, standout performances came from the likes of

Abercrombie & Fitch

(ANF) - Get Report

and

Nordstrom

(JWN) - Get Report

-- two chains that put an emphasis on sales experience and differentiation rather than price.

"These guys have stores that look great, and they're particularly attentive to their customers and making a real connection to them," Hastings says.

Slowing growth overall in the industry may explain the wave of leveraged buyouts that is transforming the retail landscape. Major brands like Toys R Us, Neiman Marcus and, most recently,

Sports Authority

(TSA)

, have been swallowed up by private equity investors looking to extract value from underperforming stores and other assets.

Meanwhile, Mance says the resiliency of consumer spending in the face of headwinds like rising interest rates and energy prices, as well as a softening housing market, also has played a role in retailers' growth plans.

"It does reflect the fact that consumers are continuing to spend despite all the negative signals," Mance says. "They're still out there, so companies are looking at ways to capture market share and grow the business. The time seems to be right to do that because the consumer seems intrepid."