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    1. Brick and mortar retail companies can still generate value by densifying their store counts in concentrated geographic areas. This allows them to achieve economies of scale through higher order sizes and volume discounts, as well as improve supply chain efficiency. 2. Retailers can also shift to more efficient small-store formats that decrease occupancy and operating costs while maintaining sales per store. Smaller stores require less capital expenditure to build. 3. Case study of Sprouts Farmers Market showed shifting to 20% smaller stores improved customer experience, reduced initial investment by 20%, and lifted new store operating margins and free cash flow conversion to around 80%.

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    1. Brick and mortar retail companies can still generate value by densifying their store counts in concentrated geographic areas. This allows them to achieve economies of scale through higher order sizes and volume discounts, as well as improve supply chain efficiency. 2. Retailers can also shift to more efficient small-store formats that decrease occupancy and operating costs while maintaining sales per store. Smaller stores require less capital expenditure to build. 3. Case study of Sprouts Farmers Market showed shifting to 20% smaller stores improved customer experience, reduced initial investment by 20%, and lifted new store operating margins and free cash flow conversion to around 80%.

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    © All Rights Reserved
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    7 views14 pages

    Creating Value in Retail

    Uploaded by

    Randy Lahey
    1. Brick and mortar retail companies can still generate value by densifying their store counts in concentrated geographic areas. This allows them to achieve economies of scale through higher order sizes and volume discounts, as well as improve supply chain efficiency. 2. Retailers can also shift to more efficient small-store formats that decrease occupancy and operating costs while maintaining sales per store. Smaller stores require less capital expenditure to build. 3. Case study of Sprouts Farmers Market showed shifting to 20% smaller stores improved customer experience, reduced initial investment by 20%, and lifted new store operating margins and free cash flow conversion to around 80%.

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    of 14

    Value Creation Strategies in Retail

    JDCC Knowledge Sharing

    Thomas Dixon

    1
    How can Brick & Mortar (B&M) retail
    companies still generate value when
    fighting eCommerce?

    2
    1. Densifying Store Count in Concentrated Geographic Area

    3
    Densify Store Footprint
    Total Number of Stores
    10% CAGR

    2016A 2017A 2018A 2019A 2020A Current

    +100 – 200 Potential New Stores in Existing Markets

    4
    Economies of Scale
    1 1
    Increased number of
    stores

    4 2 Larger order sizes

    3
    Negotiate volume
    discounts with
    3 suppliers
    4
    Higher gross margin to
    invest

    Lower Costs of Purchased Merchandise as Food Retailer Scales

    5
    Improve Supply Chain Efficiency

    Build New Distribution Centers Closer to Existing Stores

    Lower Fuel & Truck Localize Product


    Reduce Shrink Repair Costs Offerings

    6
    2. Shift to More Efficient Small-Store Format

    7
    Small-Store Format

    Decrease Occupancy
    Cost

    Reduce Operating
    Cost

    Sales per Store


    Remain Flat

    New-Store Format to have Higher Operating Margin if Smaller Stores can


    Optimize Layout and Reduce Non-Selling Space

    8
    Reduced Capex Requirements
    Capital Expenditure to Build a Store
    (in $mm, USD)

    -X%

    Old Store New Store

    New-Stores Require X% Less Capital to Build

    9
    Improved Working Capital Efficiency
    Value-generative Improvements in Working Capital

    Inventory: Improving Inventory Management

    Accounts Payable: Paying Suppliers Later

    Accounts Receivable: Collecting Payments from Customers Sooner

    Improvement in Working Capital Drives Cash Flow Growth

    10
    Case Study: Sprouts Farmers Market
    Sprouts Shifted Build to 20% Smaller Stores in Optimized Layout

    Improved customer experience in-store (tested through VR in a 3D store layout)

    Reduced initial investment required by 20%

    Reduced per store operating costs by 20%

    Improved new store operating margins by 20%

    Lifted FCF Conversion to ~80%

    11
    Cash Flow Conversion Forecast
    Free Cash Flow Conversion Forecast(1)
    100.0%

    90.0% Forecast Period


    80.0% 75%
    70.0%

    60.0%

    50.0%

    40.0%
    40%
    30.0%

    20.0%

    10.0%

    0.0%
    2015A 2016A 2017A 2018A 2019A 2020A 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E

    FCFF Conversion Builds Gradually over Forecast Period

    1. FCFF Conversion defined as Unlevered FCF divided by EBIT or Operating Income.


    12
    Sources
    Resources to Reference:
    • MarketLine Industry Profile: Food & Grocery Retail in the United States
    • IBIS World: Supermarkets & Grocery Stores in the US
    • McKinsey Insights: Is your company a value creator or a value destroyer?
    • McKinsey Retail Insights

    13
    Appendix: Free Cash Flow Impact
    Company X
    Case 1 Case 2
    Revenue $100 $100 Revenue flat – reduce non-selling space, sales per sq. ft increases
    (-) Cost of Sales 70.0 70.0
    Gross Profit 30.0 30.0
    % Margin 30.0% 30.0%
    (-) SG&A 15.0 12.0
    EBIT 15.0 18.0 Reducing rental expense and operating expense for smaller store by 20%
    % Margin 15.0% 18.0%
    (-) Tax -3.8 -4.5
    (-) Capex -2.0 -1.6 Capex falls by 20% for 20% smaller store
    (+) D&A 2.0 2.0
    (-) NCWC -10.0 -10.0
    Free Cash Flow 1.3 3.9
    % Growth 212.0%

    1. FCFF Conversion defined as Unlevered FCF divided by EBIT or Operating Income.


    14

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