Big, Best or Both

I listen to a lot of investor calls. CEOs almost always include growth as a key discussion point, and no doubt that is what investors want to hear about their companies. But let’s face it, only one company can be the largest in any industry. More importantly, being the biggest doesn’t necessarily guarantee financial success.

This year’s Top 100 Retailers ranking provides us with clues as to why being the best in your industry puts more money in your pocket. The top 10 retailers possess a whopping 65% of all the revenue in the top 100, yet only 57% of the gross profits. The next 10 (ranks 11-20) retailers represent 13.3% of revenue, yet 13.5% of the gross profits. Maybe being the best is financially better than being the biggest.

Amazon, Costco, Home Depot, Kroger, Target and Walmart sell a lot of stuff. Much of their competitive strength comes from their economies of scale and brand perception. Of the 11 moat barriers that wRatings measures, these are the only two where the top 10 out-compete the next 10 retailers.

If you want to make more money and have customers view you as the best, the next 10 retailers are leaving clues. All of these are obvious, but what these retailers do is have a relentless focus on execution in these select areas. They don’t worry about any rivals, because they are leaders, not followers. 

The number one difference for the next 10 retailers is in their ability to be distinctly innovative. This isn’t the slightly better kind, but the ground-breaking new ways to operate and deliver a customer experience kind. These innovators had no problem challenging an industry’s status quo many years ago, and today they continue to challenge even their own standards. Think Starbucks and the new Best Buy.

A second key area these retailers differentiate themselves is how they build not just loyal customers, but a community of loyal customers. Think China’s Alibaba and athletic apparel retailer and manufacturer Nike. E-commerce leader Alibaba connects manufacturers, suppliers, exporters and importers into an online B2B marketplace. Nike integrates technology into many of their products so they can connect with like-minded athletes all over the world.

Finally, the next 10 retailers are able to sign exclusive arrangements with companies, celebrities, musicians and athletes to “lock-out” their competition. This provides them with pricing power over their rivals where customers gladly pay a premium without much thought (if any!). Limited edition sneakers from Nike can drive prices up to $1,000 or more for a single pair. For decades now, Starbucks enjoys a substantial bump over well-known but ordinary brands such as Folgers and Maxwell House.

Is it better to be big or best in your retail category? When looking at gross profits, it pays more to be best and create multiple moat barriers. Then again, maybe you don’t have to choose at all. That would make you big and best just like Apple.   

Gary A. Williams is the founder and CEO of wRatings and a co-managing partner at G2 Equity Partners.