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Is All Growth “Good Growth”?

Industry leading revenue growth can be dazzling, but to shine in the eyes of investors, companies must deliver superior margin growth as well.

Industry leading revenue growth can be dazzling, but to shine in the eyes of investors, companies must deliver superior margin growth as well.CEOs and their leadership teams strive for revenue growth and the momentum and headlines such performance creates. Investors too, seek “momentum plays” and favor the high-fliers in the segment.  But does that pay off? Do competitors that deliver superior top-line growth consistently provide favorable returns for shareowners?

Not really.

Our review of 500+ public companies over $1 billion in revenue show that the fastest growers (above 15%) are no more likely to deliver above average returns, and above average-growers are only a slightly more likely to outperform. So what separates “Good Growth” from “Bad Growth”? The short answer is that only firms that grow efficiently deliver for shareowners.

Most companies (60-80 percent, depending on segment) that grow both sales and margins simultaneously delivered above average returns for shareowners (2-3x the rate for those with growing sales but flat margins). Even companies that grew margin but not sales tended to over-deliver for shareowners (approximately 50-70 percent, depending on segment).

Figure 1: Percentage of Companies Delivering Above Average Returns by Operating Performance

Digging deep in a sector makes the examples vivid and the learning more real. For example, retailers that grow both top and bottom line delivered 5 times the return of the average competitor. And no other indicator mattered nearly as much (margin expansion explained 3 times more than either revenue growth or scale, and 5-15x any other variable).

Figure 2: Correlation between TSR and Operating Metrics in Retailers



Figure 3: Relationship between TSR and Revenue Growth in Retailers

Top quartile retailers have higher multiples (average EBITDA multiple is two turns higher) reflecting optimism over continued strong performance, and this difference is increasing (top quartile multiple is expanding, while valuations in the sector are flat or declining).

Figure 4: EV/EBITDA Valuation by TSR Performance Quartile

So what lessons do the winners in retail provide? Few will be surprised to learn that iconic e-retailers Amazon and Wayfair were among the industry’s leaders in total shareholder return (TSR). Interestingly, they share that enviable position with traditional brick-and-mortar retailers of different stripes – many of whom still feature a limited digital presence – who were effective in driving top shareholder returns.

Experience Drivers: Retailers focused on improving the experience to defend against online competition. This can include developing best-in-class omnichannel experiences, doubling down on in-store service and offering “treasure hunt” type experiences that cannot be matched online. According to Jack Sinclair, CEO of 99 Cents Only and former Head of Grocery for Walmart, “a supercenter works because people buy fresh food regularly and then purchase higher margin general merchandise. We double down on that at 99 Cents Only with unique merchandise and unparalleled value.”

 Consolidators” blend accretive M&A with effective delivery of cost synergies. This occurred successfully across a variety of retail segments (i.e., Drug, Auto, C-Store) and, when done right, can have a highly accretive impact on shareowners. “If you delight your loyal shoppers with the right store experience, you naturally become a very good acquirer,” said one senior M&A Executive with a Fortune 50 acquirer. “It’s a formula that works for you or against you.”

“Portfolio Optimizers” who leverage analytics and other tools to excel in profit expansion, focusing on category excellence and profitability. Companies who excelled in this arena diversified into more profitable own-brands, complimentary categories and new business lines. Paul Breintenbach, a founder and CMO of Priceline and current CEO of R4 Technologies, a firm that leverages machine learning to unlock new avenues for growth, said, “The battle for growth is now waged with data – if you know more about what consumers want, and where and how they want it, you can serve them far more efficiently, effectively and profitably.”

Among the “Bad Growth” retailers that drove growth, but not high TSR, we saw two common traits.

• First, were those that executed “transformational deals” to significantly expand their market footprint, yet failed to improve margins. “Most deals make sense on paper, but you have to deliver on the business case,” said a senior retail sector banker.

• Second were those that chased top-line expansion at the expense of margins, trading one key performance metric off against the other. Retailers in this category often used price and/or promotions to rapidly expand top-line growth, only to destroy profits along the way.

So what can a CEO in any industry do to ensure they are delivering “Good Growth”?

Start with the customer needs: Make sure you understand not only your customer today, but how they are evolving and how your model must evolve to meet those needs. “We have driven 20 years of growth, and our top priority has always been to maintain authenticity across all of our brand channels,” said Shep & Ian Murray, CEOs and Co-founders of Vineyard Vines. “What feels right for our brand and customers is more important than the bottom line.” This point is further emphasized by David Hatfield, Chairman and Chief Executive of Edgewell, who said, “Our partnership with retailers revolves around the shared objective of attracting and delighting the consumer, whether through a differentiated offer, superior value, memorable experienc That’s what moves the needle for both of us.”

Know what drives value: Imperative to driving “Good Growth” is knowing which costs drive value to customers, especially your most valuable customers. “Growth of the modern retailer often requires tradeoffs between acquiring new customers or building lifetime value of existing ones,” said Jeremy Candade, former Head of Retail Strategy and Business Development for Walmart Global eCommerce and “While the former plays well in the short term, the latter is far more scalable and can drive significant value by anticipating core customer needs, fostering a great shopping experience rather than blindly spending on marketing.” Customer-back and “zero-based” approaches can identify 10-20 percent of costs for recycling to more valuable uses.

Nail the execution: Done correctly, this type of change will be the single largest driver of sustained profit gains. Your most trusted leader, agile and smart up-and comers, scarce finance and analytics resources must be dedicated to the effort. Twice the volume, focus and transparency of your typical communication plan will win the hearts and minds of your team.

Is your company among the top-quartile TSR performers in your industry? We recommend assessing your current strategy via four different lenses to gauge your readiness to deliver top returns going forward:

• Does your top team have a singular view on the question, “Are we winning?” That alone has filled more than a full day of good fights at many CEO and board offsites.

• Is your answer to the question, “Where do we hold true differentiation and where are the gaps?” a durable and fact-based perspective?

• What are your top 5 priorities to grow both top and bottom line? Are your most valuable resources (including time) dedicated to these 5 items?

• Do we have execution disciplines such that we consistently over-deliver in our plans? If not, why not?

“One of the most important roles for a CEO today is defining the company’s shared purpose and the narrative of how that purpose will be fulfilled,” said Mark Bonchek, Chief Epiphany Officer of Shift Thinking. “‘Good Growth’ means creating value for both investors and customers, growing the business while improving efficiency and differentiation.”

Industry leading revenue growth can be dazzling, but to shine in the eyes of investors, companies must deliver superior margin growth as well. To deliver both, chief executives and their leadership teams must blend visionary ambition with extraordinary attention to detail and unflagging rigor.

Read more: Three M&A Alternatives For Accelerating Your Digital Transformation


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