As Retailers Innovate, Cost Control Shouldn’t Take a Backseat

Large retailers continue to feel unrelenting pressure to deliver on all fronts in today’s consumer-empowered marketplace. Shoppers have more power at hand (literally!) than ever with respect to product reviews, comparison shopping and price discovery.

As we have discussed in previous articles, competition across formats and channels, in combination with ever-demanding shoppers, has forced retailers to invest aggressively across shopping channels and to embrace creative or complex business strategies, from redefining brand images, revamping store layouts and revising customer reach platforms, to further integrating omnichannel elements. However, as retail executives fight to stay relevant in a fiercely competitive market, they must also be mindful of controllable costs, which can run amok amid these many initiatives. Preserving an appropriate cost structure will reinforce accountability across the enterprise and promote financial stability while business initiatives take root. As retailers are compelled to adapt and innovate, the right strategy, investment initiatives and implementation will be the primary determinants of success or survival, while a disciplined cost structure will provide more financial runway for these efforts.

Creating SG&A scale and reorienting expenses (“fuel for growth”) has been a fundamental mission of clients in FTI’s Retail & Consumer Products practice for several years. With this in mind, FTI has evaluated the statistical relationship between cost management and relative market valuation.

We utilized a single metric to measure the effectiveness of an organization in this regard. The resulting metric, referred to herein as the Fixed Operating Cost Coverage Ratio (“FOCCR”) is defined as gross profit divided by the sum of SG&A expenses (excluding depreciation expense) plus capital expenditures (“CAPX”).