Capital Markets

Resisting Temptation

It's fat times now for lean companies. But record revenues and profits could mean lean times ahead if the fat creeps back.
Cathy LazereDecember 1, 1997

Weight-loss programs warn dieters that shedding pounds is just the first step toward a slim physique. Keeping them off presents the long-term challenge. So it goes also with companies these days. Managers trimmed selling, general, and administrative (SG&A) costs when times were tough. Now, with revenues soaring, they must remain vigilant.

So far so good, according to the 1997 SG&A Survey, produced by CFO magazine in conjunction with Arthur Andersen LLP. Booming sales have not undermined efforts to corral SG&A, which fell from an average of 18.5 cents per dollar of revenues in 1993 to 17.7 cents per dollar of revenues in 1996. In the main, companies seem to be growing sales without adding back proportionate SG&A.

What’s the secret? It has as much to do with state of mind as with techniques. Airborne Freight Corp. (dba Airborne Express), for example, relies on single-minded determination to remain the low-cost competitor in a crowded field. The Seattle-based express delivery service reduced SG&A as a percentage of revenues by 1.4 percent since the 1996 survey, while sales climbed by 44 percent. Keeping marketing costs to a minimum is paramount, says executive vice president and CFO Roy Liljebeck. In the highly cyclical building and construction industry, meanwhile, Centex Corp. vice chairman and CFO David Quinn credits the Dallas-based company’s top marks to a tight lid on corporate staffing. The result: SG&A remained flat at $3.1 billion while sales increased.

To provide readers with a richer cross section of North American companies, in our fourth annual SG&A survey we examined a larger roster than in past years, chiefly to accommodate new industry categories. All told, 1,086 companies in 43 industries competed for top honors, up from 857 companies in 33 industries last year. Performance statistics reflect the good fortune that many of these companies–all with sales of $500 million or more–enjoyed during calendar years 1994, 1995, and 1996. Revenues across the board increased by 32.0 percent from 1993 to 1996, to $4.4 trillion.

Five new industries add perspective to this year’s survey: commercial banks, engineering and construction, marine services, savings institutions, and waste management. Meanwhile, the computer and electronics field has become so dominant in American industry that we now have subcategories for closer comparisons among industry leaders.

As our industry benchmark chart indicates, the computer industry continued to leverage SG&A decreases out of impressive sales growth. For example, Adobe Systems Inc.’s SG&A decreased as a percentage of revenues by 13.2 percent, while its revenues grew by 150 percent. Also, in the electronics and network communications field, US Robotics Inc. cut its SG&A as a percentage of revenues by 7.7 percent while revenues increased 945.4 percent.

In cyclical industries, controlling SG&A costs can be tough. Take, for instance, the furniture industry. SG&A costs here are generally higher than average, and the temptation to ramp up sales and marketing expenses in good times is strong. Nonetheless, some in this group are able to boast healthy revenues while keeping SG&A down.

Furniture Brands International Inc., the nation’s largest residential furniture maker, with revenues of $1.7 billion, was able to slash SG&A as a percentage of revenues by 8.7 percent from 1993 to 1996. The company, formerly known as Interco Inc., had in previous years sold off nonfurniture lines, such as Converse (athletic footwear) and Florsheim (men’s footwear), to focus on furniture lines, most recently adding Thomasville. The restructuring was accomplished without contributing to SG&A. “Margins are thin in this industry. The corporate staff in St. Louis is lean and hasn’t grown over the years, even as sales continue to grow,” says John A. Baugh, an analyst with brokerage firm Wheat First Butcher Singer, in Richmond, Virginia.

Companies in cyclical businesses that manage SG&A well share these traits:

  • They curb sales euphoria. When times are good in a cyclical industry, it’s hard to avoid the tendency to beef up your sales force to ride the wave. More-savvy companies keep a stable sales force and focus on targeting a well-defined customer base.
  • They maintain close monitoring of operating units to make sure SG&A doesn’t show up there.
  • They make sure that a strict cost-savings philosophy pervades corporate headquarters and is instilled at the operating-unit level.
  • They give management incentives to keep costs down. More and more companies are offering options that are bottom-line driven. The vested interests of management are more closely aligned with shareholder interests.

Airborne Freight: Low Costs to Fly High

“We have a passion about costs,” says Airborne CFO Liljebeck. “Our suppliers and vendors say they’ve never seen a company with such a passion about it.”

To compete with giants like FedEx and UPS, Airborne, with annual sales of $2.5 billion, decided to be the low-cost provider. Average SG&A in the industry runs about 15.4 percent of sales. But Airborne maintains its SG&A at around 10 percent. “There’s nothing unusual about our G&A,” says Liljebeck. “What sets us apart is that we have fairly nominal marketing expenses.”

Part of Airborne’s strategy is to target high- volume customers. “Airborne doesn’t go after the consumer end user,” says Mary C. Fleckenstein, an analyst with Seattle-based Ragen MacKenzie Inc. “It targets corporations. It’s not like FedEx, which sponsors ball games.” Nor does Airborne operate expensive storefronts in high-traffic areas.

Instead, it relies on its sales force to connect with clients. The company has 300 domestic salespeople operating out of 260 offices. Controlling costs in the district offices has always been a priority. “Costs per shipment handled is one of the major concerns for district field managers,” says Liljebeck. “It strongly influences their quarterly commission. On the sales side, we’re concerned about shipments and revenue.” The size of the sales force has been stable as revenues have grown.

Corporate headquarters is located in a modest but accessible neighborhood in downtown Seattle. To make cost watching part of the corporate culture, “75 percent of the incentive plan is determined by bottom-line performance,” notes Liljebeck.

From its beginnings, Airborne chose a market niche–high-volume business clients– and configured its business accordingly. Liljebeck is confident that strategy will continue to pay off. “For 17 years, we have had a very strong corporate culture focused on being the low-cost provider because of our relative size vis-à- vis our competitors,” he explains. “We’ve structured it so we can survive whatever happens.”

Centex: Building In Security

You can’t find a more cyclical industry than engineering and construction. Although engineering and construction companies have relatively low SG&A-to-revenues ratios compared with counterparts in other industries (an average 7.1 percent versus 17.9 percent), they often have an even tougher time trimming the fat. How do they manage SG&A through lean times? Centex’s approach can be summarized in two words: low overhead.

Now that the recovery is here, Centex has continued to be vigilant about SG&A. Highly diversified, the firm has revenues of about $3.8 billion. There are three main divisions: home building, contracting and construction services, and financial services. Home building accounts for about 64 percent of revenues; contracting and construction services, 32 percent; and financial services, 4 percent.

Centex’s corporate headquarters, in Dallas, remains lean through recession and boom times. “We have a very small corporate staff– about 100 people,” says CFO Quinn. “We consolidate taxes, legal, employee benefits, accounting, and treasury for the business segments.”

“The philosophy is to keep the corporate team very small,” Quinn notes. Staffing up is done at the operations level.

Marketing and sales are handled by the separate operating units. Compensation packages in the operating units are designed to motivate managers to control costs. “If you align your incentives with [those of] the shareholders, [managers are] going to take care of those cost items,” says Quinn.

The incentives are driven off such drivers as operating earnings as a percentage of revenues, or margin, or return on assets or revenues. “If you’re more diversified, as we are, you want to push those drivers and responsibility for costs down to the operating- group levels,” Quinn says.

Recently, this philosophy was tested by the addition of two major business units to Centex’s financial services division. To cope with the G&A demands of the new entities, the financial services division created a global support group. “Accounting, treasury, marketing, legal, and MIS will now support all the business units, so we’re not replicating functional areas,” says Quinn.

Centex’s decentralized philosophy of placing responsibility with the operating divisions makes sense for a cyclical business. “We in corporate can counsel and influence. But it’s the CEOs in the operating groups that have to take responsibility and make the tough calls,” concludes Quinn.

Southdown: Cementing SG&A

The building-materials industry, like the engineering and construction industry, is subject to the whims of the economy. The beginning of the decade was particularly nasty. Foreign imports flooded the market and brought prices down.

To survive, companies were forced to reexamine all costs, including SG&A. “In the early 1990s, profitability was at a low,” recalls Tom Daman, vice president and treasurer of Southdown Inc., a $664 million cement company in Houston. “We attacked what we could attack most aggressively.”

And, during the past three years, as the cement industry rebounded, Southdown has kept a lid on its SG&A. “We’re in the process of expanding capacity now,” says Daman. “We’re not inflating costs to the level we’re gaining revenues.