VideoLet's face it. In the seventh year of the strongest bull market since World War II, the subject of cost savings is generally less riveting than, say, the size of the latest mega-merger. So it is perhaps not surprising that, with few exceptions, CFO magazine's sixth annual SG&A survey reveals little progress in the battle to lower selling, general, and administrative costs.
Overall, in fact, it's a losing battle, to judge by average SG&A in the three years used to compute the current survey. More progress seemed likely four years ago, when the clamor for reengineering was nearly deafening.
Modest backsliding prevails, according to results compiled by Arthur Andersen LLP. The companies studies this year increased SG&A as a percentage of sales by 30 basis points, to 16.4 percent of sales, or $702.7 billion. All told, the increase in SG&A-to-sales swallowed nearly $13 billion. Sound slim? Had companies shed 30 basis points instead, they would have shipped roughly $17 billion to their collective bottom line, after taxes. That's worth fighting for. "Is there a correlation between the ability to drive market share and the ability to drive down costs?" asks Dell Computer CFO Thomas Meredith. "Unequivocally, yes."
As in the other SG&A surveys, we singled out companies that appear to be winning the good fight. Big winners had to meet three criteria: they had to be the leanest in their industries in SG&A; their overall cost structure, encompassing SG&A and cost of goods sold (COGS), must have declined from year-end 1995 through year-end 1998; and this decline must have outpaced that of their competitors. Dell, for example, lowered SG&A by 143 basis points and COGS by 236 basis points over three years, or 370 basis points in total. The competition, as a group, added 78 basis points to cost structure. Dell's edge, 457 basis points, helps explain its superlative earnings performance.
This year's leaders represent 11 industries: automobile retailing, food and drug retailing, mining and crude-oil production, apparel, truck transportation, computer manufacturing, publishing and printing, building materials and glass, beverages, textiles, and semiconductors.
Whatever the industry, leaders share certain propensities. Take Sonic Automotive, for instance. "If you could see my office, you would see our attention to costs," says Sonic CFO Theo Wright. He proudly occupies a small, sparsely furnished interior office on the mezzanine floor of a car dealership, one of 100 outlets that constitute the Charlotte, North Carolina, company. Over the three years covered in the survey, Sonic posted an average SG&A-to-sales of 9.11 percent, versus the industry average, 13.24 percent. Moreover, Sonic stayed just about even in three-year average cost-to-sales, down 1 basis point, while the industry added 180 basis points to average cost structure.
Compensation plans are tied to overall profit margins, Wright says. General managers of each dealership are paid a percentage of profits, and they receive additional compensation for annual increases to profitability. As business grows, Sonic sets higher profitability measures. Sonic watches SG&A closely and in great detail. Every dealership knows where it stands by expense category, and how it stacks up against other dealerships that Sonic operates. Because Sonic owns Ford dealers, General Motors dealers, and DaimlerChrysler dealers, managers on each site routinely compare their cost management with dealers of like vehicles. But Wright warns against draconian cost-cutting. "Our objective is not to minimize SG&A," he says, "but to increase profitability."
Slim Margins Motivate
Sonic's pretax profit margin is only 3 percent. And nothing brings SG&A into focus like slim margins.
It's a motivator shared by many of the top SG&A performers. "When you have very narrow margins," says CFO Jerry Walton, of Lowell, Arkansas, truck operator J.B. Hunt, "pennies count." There are 60,000 truckers in the United States willing to haul freight, and competition is fierce. Without a 5 percent margin overall, says Walton, a trucking company cannot afford to replenish its assets. "Every member of management, all our operating people, and most salaried employees are paid a bonus based on the operating ratio," Walton says.
To compute its operating ratio, J.B. Hunt divides all expenses other than interest and taxes by revenues. Expense budgets are set each year on a monthly basis, and one member of the staff assumes responsibility for each specific expense category. Besides encouraging operating managers to keep tight lids on the expenses they oversee, the arrangement creates incentives to work as a team toward lowering costs. If office supplies are lean, for instance, but travel and entertainment gets out of hand, all bonuses are affected.
BJ's Wholesale Club Inc. also marches to the beat of narrow margins. The Natick, Massachusetts-based food retailer beat the average reduction in costs of sales by 41 basis points. "We have to have the lowest expense structure or else our business model doesn't work," declares BJ's CFO Frank Forward. Because BJ's competes largely on price, gross profit margins are well below supermarket standards — about 12 percent versus 25 percent.
Reader Comments» Post a comment