When it comes to value creation, retailers have never had it easy. The challenges are well-known: consumer preferences and behaviors are fast changing and rarely predictable. Many retail businesses are highly dependent on supplier actions—a fact that’s become evident to consumers in recent years as supply chain disruptions resulted in rampant out-of-stocks. Given retailers’ heavy reliance on frontline workers, fluctuations in labor markets have a more pronounced effect on retail than on other sectors. And typically thin margin profiles mean that retailer valuations are exceedingly sensitive to macroeconomic conditions, capital costs, and investor expectations.
It hasn’t been getting any easier as of late. Indeed, an ever-shrinking number of retailers accounts for most of the value creation in the sector. This group consists almost entirely of retail giants, with revenue exceeding $50 billion each. What’s more, one in four retailers are now destroying value, up from one in six just 15 years ago.
Is this an irreversible trend? Must less-than-gigantic retailers resign themselves to low returns? Is scale—or the lack of it—the ultimate determinant of a retailer’s success?
The answer to these questions is, unequivocally, no. Our analysis of more than 280 publicly traded retailers reveals that, through bold action and disciplined execution, retailers of all sizes can become high-performing value creators—and can even move from the bottom quartile to the top quartile. Our findings give retail executives a blueprint for realizing the full potential of their businesses, regardless of their starting point.
Grow big or get bold
There isn’t just one valid metric to quantify value creation. Total shareholder returns (TSR), return on invested capital (ROIC), and economic profit, to name three, are each an important performance metric for any retail management team and board to monitor and debate. For our analysis, we looked at economic profit (defined as the spread between ROIC and the cost of capital multiplied by the amount of invested capital) to isolate financial performance from the volatility of market expectations.
Scale begets scale
From an industry-wide perspective, the picture actually looks quite rosy. The retail sector’s economic profit doubled over the past 15 years, growing at a 6.8 percent clip per year—from $67 billion in 2010 to $159 billion in 2023.
But a closer look reveals trouble: the sector’s upward trend in economic profit masks vast disparities across retailers. Value creation is becoming more concentrated over time, as we observed in our previous article. The top decile of retailers by revenue accounted for a whopping 81 percent of the sector’s economic profit in the 2020–23 period, up from 66 percent in 2010 to 2014. And, as mentioned, the share of companies generating negative economic profit has risen—it’s now 23 percent (Exhibit 1). These value-destroying companies represented a 14 percent drag on total sector economic profit in 2023, up from just 4 percent in the 2010–14 period.
Generally speaking, value creation in the sector tends to correlate with scale. In 2023, the top quartile of retailers by economic profit was ten times larger by revenue than the bottom quartile—and, in fact, almost eight times larger than even the second-quartile value creators. This scale effect resulted in a fairly predictable roster of long-term winners over the past 15 years, with big companies such as Home Depot, Nike, and Walmart making regular appearances in the top quartile (see sidebar, “Value creation in retail subsectors”).
But scale isn’t everything.
There’s more to the story than scale
We took our longitudinal analysis a step further. To understand whether certain retailers have been able to punch above their weight, so to speak, we studied economic profit relative to revenue. Using this metric, our analysis revealed that 24 retailers—less than one-tenth of our total sample—managed to move up the value creation curve: they were outside the top quartile in the 2010–14 period but joined the top quartile in the 2019–23 period (Exhibit 2). Of these 24 retailers, most of which have annual revenues of less than $10 billion, half made the leap from the second quartile to the top quartile, while the other 12 climbed all the way up to the top quartile from below the median.
How did these ascendant retailers—“movers,” as we call them—pull off such a feat? To find out, we examined the underlying drivers of economic profit: operating margin—specifically, cost of goods sold (COGS) and SG&A ratios—growth, and capital efficiency. We found that movers were significantly more likely than “nonwinners” to improve their performance in at least two of those dimensions: 63 percent of movers did so, versus just 27 percent of nonwinners. One-fourth of movers (but only 3 percent of nonwinners) improved performance on three dimensions. Simply put, movers were able to fire on all cylinders and effect holistic change (Exhibit 3).
Most strikingly, movers managed to deliver substantial improvements in EBITDA margin: nearly half of movers, versus only 12 percent of nonwinners, notched more than 400 basis points of improvement. The disparity was more notable in SG&A than COGS, with movers being three times more likely than nonwinners to reduce SG&A load by at least 200 basis points. This came in part from leverage through faster growth—movers grew 1.5 times faster than nonwinners—but also through real cost discipline. For nonwinners, SG&A costs in the 2019–23 period grew at 1.2 times the rate of topline growth, compared with only 0.9 times for movers. (COGS ratio was less of a differentiator—likely because almost all retailers pulled back on promotions and discounts during the global supply chain disruptions of 2021 and 2022, yielding record gross margins for many retailers.)
Efficient growth also set movers apart. In addition to growing 1.5 times faster than nonwinners, movers were 1.9 times more likely to accelerate growth. And movers achieved capital-efficient growth, with 42 percent of them (versus only 19 percent of nonwinners) increasing capital turnover by 0.5 times or more.
The clear takeaway from our analysis: scale is not destiny. Subsector dynamics notwithstanding, a retailer has ample control over its value creation trajectory. Retailers of any size, if they make bold moves, can become top-tier value creators—even if they’ve historically underperformed.
How to create value in volatile times
How exactly did movers achieve their outcomes? What actions enabled them to rise above challenging economic conditions? In our analysis of movers’ varied paths to value creation, five common themes stood out.
- A well-defined, multipronged growth strategy. Movers accelerated growth by pursuing high-potential opportunities in each of three main growth pathways: identifying where and how to take share in their core business; expanding into adjacencies in which brand equities would successfully translate; and making high-ROI bets on breakthrough businesses, including on new “beyond retail” business models such as commerce media and data monetization. And, critically, when new demand trends emerged—such as “casualization” in apparel, spending on the home, or consumer downtrading—movers had both the organizational and financial agility to capitalize on the trends.
- Technology and the surrounding organization, rewired to outcompete. Strategic plans often fail without the right technology—systems, infrastructure, and organization—to execute them. Movers invested in not just the requisite tools but also the product management capabilities to scale the use of those tools. They placed (and continue to make) big bets on enterprise technology and solutions that power core retail processes, thereby boosting capital and cost efficiency while delivering growth. Movers also recognized early on that AI is reshaping each of retail’s core functions—and have embarked on the journey of rewiring their technology and organization around digital and AI capabilities.
- Relentless customer focus across value, loyalty, and experience. Movers doubled down on creating customer “stickiness.” They continue to optimize customer engagement in every part of the marketing funnel, from awareness and brand-focused communication to precision-targeted messages to loyal customers. Personalization of the customer experience is a crucial part of this endeavor: leading retailers are integrating digital technologies into stores and putting inspiration, recommendations, and relevant offers directly in front of in-store shoppers. In addition, movers are using data-driven merchandising—encompassing assortment and private-brand excellence, pricing, and promotions—not just to grow revenue and margin but also to improve customers’ value perception and long-term loyalty.
- Aggressive management of cost structure to boost efficiency while fueling growth. Movers made targeted investments in growth—be it store expansion, marketing campaigns, or digital initiatives—but did so while maintaining cost discipline in both COGS and SG&A. The most successful and resilient retailers regularly conduct a top-down review of COGS across the enterprise while innovating in both sourcing and product development. At the same time, they increase SG&A efficiency by using modern operating models, ranging from open-to-buy planning to clearance and liquidation. Movers also create a professionalized and empowered procurement function with a broad mandate, including overseeing increasingly large areas of spend for retailers (such as energy and technology).
- Upping the game in capital planning and allocation. Movers put robust governance and analytics on capital expenditures, with a very clear understanding of short- and long-term ROI. They bring capital-planning decisions out of the shadows of financial planning and analysis, putting them front and center with the top team—thus securing alignment on the enterprise strategy, trade-offs, metrics, and guideposts to monitor on the path to value creation, as well as the governance needed to execute. In a landscape where bold investments in automation and AI are a must, it’s not enough to allocate the funding; delivering the expected ROI requires disciplined execution and long-term accountability.
Retailers aspiring to become—or remain—top-tier value creators should ensure that their leadership teams are aligned on the answers to the following questions:
- Do we know where we’ll grow, and is the growth equation realistic? How much growth can come from share gains in the core business, how much can be tapped via expansion into adjacencies, and where will we need to place step-out bets on new models, new brands, or inorganic moves?
- Is our five-year tech and AI road map bold enough? Have we adapted our organization and operating model to capitalize on the capabilities we’ll build—or are we just plugging new capabilities into old ways of working?
- Why would customers continue to choose us over the competition? How can our offers, engagement, and experiences get better and more personalized, creating reasons for customer loyalty beyond product and price?
- How will we fuel investments in growth and customer experience through ongoing efficiency, including AI- and tech-powered opportunities across the entire organization?
- How will we refine our capital planning and allocation processes to ensure that they support our ambitions?
- Do we have clarity on how growth, cost discipline, and capital productivity will come together into a value equation that will deliver sustainably for investors? And how can we strengthen our ability to deliver on all three fronts at once?
Size guarantees neither outperformance nor sustained success. In the same way, lack of size doesn’t condemn a retailer to forever be a low performer or a value destroyer. Creating value in retail is a matter of making courageous decisions and bold moves—and the time to start is now.
