STORES Global Powers of Retailing 2009 - (Page 38) 2009 global powers of retailing Why is the Q ratio useful? Why should we care about the Q ratio? In recent years, one of the biggest challenges facing any retailer has been commoditization, as consumers increasingly view price as the only differentiator among retailers. This attitude causes intense price competition and tends to drive down margins. Only the lowest-cost leaders in any retail segment can compete primarily on the basis of price - all others must do something else. The antidote to commoditization, therefore, is clear differentiation through better customer experience and innovation. In addition, such differentiation must be well communicated to consumers through strong branding. Consequently, a high Q ratio indicates that the financial markets believe a retailer is doing the right things to succeed in the current business environment. A Q ratio below one may indicate that the financial markets believe a retailer is failing to use its physical assets in a profitable manner. There are, however, two caveats. First, some retailers are more asset intensive than others, with some leasing rather than owning stores, a fact that can distort a Q ratio. The Q ratio should therefore be taken with a grain of salt. Second, the recent steep drop in equity prices around the world stemming from the global financial crisis means that Q ratios are unusually low. Indeed, as indicated in our charts, many companies now have Q ratios below one – a far cry from last year’s numbers. Still, the value of the Q ratio is not simply the absolute number but the difference between companies or groups of companies. Here are some highlights from our analysis: • Not surprisingly, the companies with the highest Q ratios include retailers well known for their strong brands. These include specialty apparel retailers such as Hennes & Mauritz, Fast Retailing (better known for the Uniqlo chain in Japan), and Inditex (best known for Zara), as well as such names as Apple and Amazon. In addition, near the top of the list are several food and general merchandise retailers, including discounters such as Dollar Tree and Family Dollar. • Interestingly, while four retailers from the Asia Pacific region are among the top 10 retailers on the Q ratio list, the composite Q ratio for Asia Pacific retailers is relatively low. The highest composite is instead held by retailers from Africa/Middle East, followed closely by those from North America. Retailers from Asia, Latin America, and Europe are clustered with low Q ratios. • If Q ratio is examined for countries with three or more retailers on the list, South Africa comes out on top, followed by the U.S. and then Canada. The lowest composite Q ratio belongs to Germany. • We also evaluated composite Q ratios for retailers based on both their dominant merchandise category and dominant retail format. On this basis the category with the highest Q ratio is hardlines, or retailers specializing in durable consumer products such as electronics and furniture. This is surprising, given that in previous years fashion retailers have traditionally had the highest Q ratio, and it likely reflects the fact that fashion-oriented department stores have been particularly hard hit by the economic crisis. It is perhaps not so surprising that the diversified category, or retailers with no dominant category, have the lowest Q ratio. • As for dominant format, the highest Q ratio belongs to electronics, cash & carry, and non-store retailers. Unlike in past years, apparel specialty chains performed poorly in this measure. Clearly, the troubling economic environment has wreaked havoc on the expected order of things. What the numbers show This year we have calculated the Q ratio for 144 companies (last year we had 146 companies on the list). The arithmetic average Q ratio is 0.846 and the composite Q ratio (which is calculated by taking the sum of all company’s market capitalization and dividing by the sum of all company’s asset values) is 0.745. Last year these figures were 1.332 and 1.571 respectively. This reflects the steep decline in equity prices globally. Calculations for each company were based on asset data from the most recent financial statements and market capitalization (share price times number of shares) as of November 2008. G3 STORES / January 2009 www.deloitte.com/consumerbusiness http://www.deloitte.com/consumerbusiness
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