Growth – a double edged sword?

Revenue growth continues to be the key metric reported for retailers (particularly listed retailers). However, revenue growth can often be a double-edged sword.

Five key factors to consider, to ensure growth delivers the expected benefits, are:

Documented strategy

A documented strategy allows you to set objectives and determine if a new store or business unit (through either organic growth or acquisition) is a ‘success’. Whether the objective is purely to generate sales growth, marketing reasons, new customer acquisition, or blocking a competitor, the retailer should be clear and able to articulate that strategy.

Profitability at a company level, not just a store level

It is important to consider incremental sales (excluding cannibalisation of existing store sales) and ensure they exceed incremental store costs (including incremental overheads). A store that looks profitable, or has a positive contribution on a stand-alone basis, is different to a store that is profit accretive for the business.

Optimal use of management bandwidth

Growth takes time, particularly management time, which may reduce the bandwidth available for managing the business or other initiatives. It is important to consider what bandwidth is realistically available, if the growth initiative is the best use of available bandwidth, and what support may be available to free up bandwidth.

Working capital requirements

While the capital requirement for acquisition and fit out is generally well understood, working capital requirements associated with growth are often overlooked. New locations need stock and bank guarantees and potentially take time to grow, meaning a different working capital cycle to other stores.

Debt vs equity

Who funds this growth – debt or equity? While debt may increase upside for investors, it often comes with more risk, cost and restrictions (covenants). The capital structure needs to fit with the longer term strategy so as to not burden the existing business (new ventures within an existing business are start-ups too!).

Without reflecting on each of these considerations, growth may not deliver the expected profitability improvements, may cause management to lose focus on the core business, strain working capital or restrict options available to a retailer in the longer term.