Business Development Metrics

This is the post about the dangers of blind allegiance to tools and metrics. In the wrong hands, used for the wrong purposes, they can be killers.

Today’s metric: Same store sales. This metric is used in the retail industry to look at the underlying performance of existing stores by separating out revenue growth from new stores. This makes sure that new outlet sales don’t mask weakness in performance from stores that are already open. Its value is that it puts the focus squarely on a company’s ability to increase demand for its products, a less expensive option than opening new stores and more indicative of underlying strength. Over time, same store sales has become the all-important metric for analysts that track the industry. One bad month reported, one share price drop more or less certain.

The hidden dangers?

Well, they come if retailers are so focused on these numbers to protect their share price and meet Wall Street expectations that they start making poor strategic choices. Problems can come from bad decisions made against either of the two components that make up same store sales number: price or store traffic.

1. Price: The introduction of new, higher priced items will drive up same store sales even if store traffic remains the same. Often nothing wrong with that. But not if a company drifts away from its core values. As an example, The Gap started introducing more and more expensive items in the 90s and eventually lost touch with its consumer base and what it stood for. Maybe another example is Starbucks that’s been introducing all sorts of high-priced paraphernalia, some of it (e.g. music) well beyond the core business of coffee. At the very least, these items complicate what the Starbucks brand stands for.
2. Store traffic: The other side of the coin (and the more common) is increasing sales by cutting prices. As long as volume goes up enough to cover the price discounts, same store sales will continue to increase. The problem is that this is often a short term fix that will run out of steam. A recent example is Bed Bath & Beyond. Its same store sales were propped up by discounts for a while but, in 2007, it had to warn that its earnings would be lower than expected. All the while its same store sales had been increasing, the quality of its sales had been falling. When a company goes down this path to increase its store traffic, it can find the road back to health a very long haul since its brand may well be indelibly marked and cheapened.

As with the previous posts in this series, I am not advocating that this metric is abandoned. Rather I’m proposing that the limits and blind spots of all tools and metrics are better recognized. That will help protect companies from being run by their metrics rather than them using metrics to run their business better.

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