Complexities of large retailers can offset the benefits of economies of scale
TORONTO, Nov. 7, 2013 /CNW/ - High overhead costs have the potential to offset strong gross margins, according to a PwC survey of retailers across the grocery, apparel and specialty categories.
The 2013 Retail Benchmarking Survey, released in partnership with the Retail Council of Canada, found that while larger retailers may have several advantages due to their size, the benefits of the economies of scale are often offset by the complexities and duplication of functions that exist within these companies.
The survey also found that retailers with higher gross margins are also more likely to have higher costs, especially in marketing and merchandising. While this has a cyclical effect, the data shows that cost management is a stronger factor in determining net margins than gross margins.
"Retailers face the challenge of managing their retail formats to create a differentiated customer experience while at the same time balancing their operating costs and gross margins," says Ilya Bahar, PwC's National Consulting & Deals Leader, Retail and Consumer. "However, simply focusing on sales is not the answer—retailers need to look at areas for cost containment while still maintaining a competitive advantage."
The nature of costs can differ between regions as well. For example, while Canadian retailers enjoy higher sales and margins per square foot than their US counterparts, Canadian businesses also face higher labour and occupancy costs.
Other highlights from the Retail Benchmarking Survey include:
- Of the three retail categories surveyed, grocery has the highest sales per square foot - a median of $510, compared to $336 for apparel and$325 for specialty.
- Driven by unique fashion products (as opposed to the relative homogeneity of grocery merchandise), apparel retailers enjoy the highest gross margin (median of 58%)—well above the 30% for grocery and 41% for specialty. However, apparel also sees higher store expenses than the other two categories due to significantly greater occupancy costs.
- Grocery spends the least on head office expenses, with a median of 5.8% compared to 15.8% for apparel and 11.5% for speciality. This is likely due to pressure from lower margins. Overall, across all three categories, marketing and supply chain costs represent the largest portions of these expenses.
"Not all retailers experience the same cost challenges—these can differ depending on the size, location and category of the business," says Bahar. "To this end, it's crucial for retailers to determine where they fit on these scales and use this information to see where they can reduce expenses, and if possible, redundancies."
About PwC Canada
PwC Canada helps organizations and individuals create the value they're looking for. More than 5,700 partners and staff in offices across the country are committed to delivering quality in assurance, tax, consulting and deals services. PwC Canada is a member of the PwC network of firms with more than 180,000 people in 158 countries. Find out more by visiting us at www.pwc.com/ca.
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About the Retail Council of Canada
Retail Council of Canada (www.retailcouncil.org) is the Voice of Retail. Founded in 1963, RCC is a not-for-profit association which represents more than 45,000 stores of all retail formats, including department, grocery, independent merchants, regional and national specialty chains, and online merchants.
SOURCE: PwC (PricewaterhouseCoopers)
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