Diversification pays dividends in 2008

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Diversification pays dividends in 2008 An analysis of the Top 250 by level of globalization and level of format diversification shows that diversification paid dividends in 2008. Higher growth rates and better profitability were enjoyed by retailers that were more globally ambitious, as well as those that operated a more diverse portfolio of formats. Diversification may play an especially important role in a difficult economic environment as a way to mitigate the risk inherent in a single geographic area or way of doing business.

Retailers with a more global base of operations performed better than those with no international operations in fiscal 2008. Among the Top 250, 100 retailers were single-country operators, while 50 operated in 10 or more countries. The retailers operating in 10-plus countries grew sales a full percentage point greater than the single-country operators, and their return on sales were more than twice those of the retailers that operated exclusively in their home country.

In order to maintain an aggressive growth trajectory, most of the world’s largest retailers have developed multiple sales formats. In fiscal 2008, 131 of the Top 250 operated with some level of format diversification, but even companies with a diverse portfolio of retail concepts tended to have one format that accounted for the majority of their sales. Only 34 Top 250 companies did not have a dominant format.

Unlike 2007, where more-focused retailers demonstrated better sales growth and profitability, the opposite was true in fiscal 2008. Multi-format companies grew sales much faster than their single-format competitors, most of which tend to be specialty or department store retailers selling predominantly discretionary merchandise.

While format diversification boosted sales in 2008, retailers operating too many concepts and formats can experience diseconomies of scale resulting from increased marketing and operational complexity. This may be one reason why the most diversified group was the least profitable. Also worth noting: Retailers that operated a more diverse format portfolio were larger and more global in their operations than those that relied primarily on a single format