Introduction
The phrase ‘like-for-like sales’ entered the retail lexicon in the 1980s and quickly became one of the most commonly used measurements in the sector, rivalling sales per square foot as the metric of choice for underlying performance.
Stripping out the sales generated from new space gave retailers and stakeholders alike a good indication of how the underlying business was performing against previous periods. This was absolutely essential at a time of rapid expansion in the high street and the emergence of large out-of-town shopping centres.
But despite it being a relatively straightforward concept, comparing like-for-like (LFL) sales between different retailers is fraught with difficulties. The sector has never had a standard definition of the measurement, meaning companies use a diverse range of methods to calculate the figures they report. They are free to pick and choose which elements to include or exclude, meaning elements can potentially be pulled in or out at will to ensure sales figures are shown in the best possible light.
“Without an industry standard, retailers have understandably been creative in how they choose to declare like-for-like sales publicly,’ says Tim Denison, Director of Retail Intelligence at Synovate Retail Performance.
The increasing importance of online sales and emerging retail operating models have also brought into question the future relevance of like-for-like sales as a primary performance metric - making comparisons has become even more fraught with difficulty.
The KPMG/Synovate Retail Think Tank met in July to consider whether the calculation of like-for-like sales requires a set of guiding principles, to ensure they remain relevant to external stakeholders, or whether the measurement is simply past its sell-by date and needs to be consigned to the scrapheap.
The most opaque metric used in retail?
While like-for-like sales figures are popular with City analysts and the media alike, there are huge issues around how the figures are collated, interpreted and presented. Key to this is the lack of a standard definition.
No industry or regulatory body has ever set out rules or principles for retailers to use when compiling like-for-likes, making it impossible to accurately compare performance between retailers. An individual retailer’s definition of what constitutes like-for-like sales can also change over time, potentially rendering its own figures difficult to interpret.
“It’s probably fair to say that one of the most misunderstood and opaque metrics used in modern day retailing is that of like-for-like sales,” says Neil Saunders, consulting director at Verdict Research. “It really shouldn’t be this way, of course; the general concept is straightforward enough and, as a measurement, the principle of LFL is a useful one. The problems stem from both the wide variability in what actually constitutes LFL and also from a lack of care in the interpretation of LFL figures which often leads to misuse of the metric, especially in media reporting.”
As it stands, decisions on whether to include items such as VAT, inflation, refurbished or extended stores, the cannibalisation of sales from other stores, change of product mix, promotional sales, vouchers and staff discounts are all down to individual retailers and very seldom explicitly stated. This can leave external stakeholders baffled over
what truly constitutes like-for-like, making invalid comparisons in performance between individual businesses.
“What’s appropriate for one business’s internal decision making will not necessarily be appropriate for another,” says Helen Dickinson, KPMG’s UK Head of Retail. “Hence we are left with a challenge around what is an appropriate external measure of relative performance. Banishing the LFL as a measure to benchmark relative performance is not necessarily the answer, but greater consistency and transparency on how retailers calculate this much loved measure is long overdue.”
Timing can also contribute to wildly differing measures of like-for-like sales. During the crucial Christmas period, for instance, there are no rules over which weeks should be counted to provide consistency across the sector.
“It is easy to pick the ‘best’ period to report upon, particularly at the key Christmas period,” says Nick Bubb, Retail Analyst at Arden Partners. “This was clear last Christmas, when some retailers missed out the poor snow-disrupted week in early December 2010 from their figures and included the less-disrupted week in early January 2010 instead, delivering rather better LFL sales growth than their peers. In future, retailers should be obliged to give figures for the same five week reporting period to early January as the ONS and BRC measures of retail sales.”
A misunderstood measure
Even with its inherent vagaries, like-for-like is still a popular measurement used extensively by analysts and journalists. The Retail Think Tank argues that it is often overused and, more importantly misused. Taking it as an overall guide to the general health of the retail market or as a measure of consumer demand is highly misleading.
“While LFLs are useful in the context of individual retailers, they are much less helpful when exploring the wider retail picture,” says Verdict’s Neil Saunders. “Indeed, LFLs should categorically not be used to assess the overall health of the retail economy. Unfortunately this often happens within media circles and often leads to some irksomely inaccurate headlines.”
“From a macro-economic point of view, the like-for-like measure of sales is not actually much use. Economists care about how much consumers are spending in total. It is largely irrelevant how those sales are split between stores that were already open and new stores,” says Vicky Redwood, Senior UK economist at Capital Economics. “The best macroeconomic measure of sales is one that includes as much as possible – including online and other multi-channel methods of sales.”
The lack of standardisation creates difficulties in making direct comparisons between different retailers and even for a single business, like-for-like sales are just one indicator of its overall performance. Assessment of the health and value creation of a retailer requires a balanced view across a much broad set of metrics covering cash generation, profitability, and productivity.
“Like-for-likes provide a general guide to short term performance, but it takes a lot more to nail down the actual health of individual players,” says Mark Teale, Head of Retail Research at CB Richard Ellis.
However, those companies considering dropping like-for-like metrics altogether because of these issues would have to tread very carefully, warns Arden’s Nick Bubb. “Retailers who are growing their store estate particularly quickly may well claim that LFL sales are not a fair measure of all that their business is doing, but the City is rightly suspicious of retailers who refuse to give LFL sales figures,” he says. “After all, human nature would suggest that such retailers probably don’t give LFL sales figures only because the figures don’t look very good...because otherwise they would be shouting about them.
The online effect
The retail world has undergone a major transformation since like-for-like became a widely-used metric. The growth in online shopping means that store sales, on which like-for-like figures are historically based, are no longer the be-all and end-all for retailers.
John Dawson of the University of Edinburgh says “The way that channel structure evolves also affects like-for-like sales interpretation with shifts away from store based selling, which is the basis of LFL calculation, having the potential to reduce the total of store based sales even within an overall growing market.”
As consumers increasingly choose to make their purchasing decisions from the comfort of their sofas by laptop, or on the move by smartphone, the contribution of outlets to overall sales is changing. As we look ahead, many companies are more likely to have to take into account store closures in like-for-like measurements than new openings.
“Today, there is limited new shop space coming into play in the UK and the real opportunities lie on the virtual high street,” says Richard Lowe, Head of Retail & Wholesale at Barclays Corporate. “The lack of accounting standards around like-for-likes mean there is no clarity as to how internet sales should be accounted. A retailer may well be enjoying remarkable online growth with sales driven through a combination of click-and-collect and purchases made via the internet (often preceded by a store visit) but, these are not visible if you were to look at business’ like-for-likes in isolation.”
The relationship between online and physical sales is far from clear-cut and very difficult to define. Stores can still play a vital part in situations where customers make a purchasing decision after a store visit but carry out the transaction online. However, their contribution is virtually impossible to measure.
“It is getting hard to know where the boundaries lie,” says Arden’s Nick Bubb. “In this age of ‘bricks and clicks’ it is reasonable to include online sales in LFL sales, but it would helpful if online growth is separately disclosed, so that the performance of the stores themselves can be monitored.”
The influence of online activity also raises the issue of whether negative like-for-like store sales should still be viewed in a bad light. If like-for-like is to continue to be a useful measurement of performance for external stakeholders, the contribution of online must be recognised.
Guiding principles
Having considered the various issues associated with like-for-like sales figures, the Retail Think Tank concluded that it still has a vital role to play in helping to understand a company’s underlying performance. But if it is to continue to be relevant to stakeholders, it needs to adapt to the new realities of retail today and be consistent across the retail sector.
In order to provide this consistency, the Retail Think Tank suggests a set of guiding principles that retailers should follow when drawing up like-for-like figures, taking the view that areas excluded from total sales, to derive like-for-like sales should be kept to a minimum. The following principles should form the basis of standard approach for calculating like-for-like sales:
New stores and store closures
Like-for-like measurements were introduced to reveal the underlying performance against previous periods. Including new or closed stores would render the metric meaningless and so must continue to be excluded. New stores should be introduced on their 12 month anniversary for year on year calculations.
VAT
VAT can be easily broken out of sales figures. Retailers should provide like-for-like sales figures both including and excluding VAT, in order to aid the comparisons between retailers who have varying mixes of products attracting VAT at different rates.
Inflation
Pricing is an integral part of the overall sales proposition and hence no adjustment should be made for pricing changes.
Store refurbishments
The impact of store refurbishments should be considered a regular part of doing business and as such should not be excluded from like-for-like sales and no adjustment made for the period of closure. Only in circumstances where a store has to close for a substantial period of time due to a fundamental transformation and it contributes a significant portion of the chain’s income should an adjustment be made. In such circumstances it should be treated as a new store.
Store extensions, mezzanines, etc.
The Retail Think Tank concluded that the impact arising from any change to a store that results in an increase to the square footage of that store should be excluded from like-for-like sales as the extension does not represent comparable capacity.
Cannibalisation
The loss of sales from a store to a recently opened store in the nearby area is difficult to measure in isolation. One member argued that this simply meant the new store was opened up too close to the existing outlet. The Retail Think Tank’s view is that these situations should not be adjusted in like-for-like figures.
Product mix changes
The updating and change of product ranges at stores is a part of life for all retailers and so should not be excluded from like-for-like sales.
Discounts, promotions and vouchers
The Retail Think Tank takes the view that the discount element of any promotional sales should not be included in like-for-like sales. Therefore, any discounts should be reflected in like-for-like sales at the value that the customer paid. In the same vein, future money-off vouchers should only be taken into account at the point of redemption.
Websites
It is vital that online sales are incorporated into like-for-like sales if they are to provide external stakeholders with an accurate view of a firm’s underlying performance. Sales generated through the application of new technologies (whether online or mobile) or new distribution channels (such as catalogues) should probably be included in the LFL calculation as they are generated and supported by using existing retail physical store capacity.
In much the same way as for physical outlets, the impact of any upgrades to a website or change in product mix should be included in like-for-like sales, while new website launches should be excluded until after the 12-month anniversary.
Only if sales from alternative channels are demonstrated to be completely independent of the existing portfolio, should they be excluded. The Retail Think Tank expects this to be rare for retailers operating in both physical and virtual space as the brand and marketing impact would be difficult to separate even if it were possible to attribute individual sales directly to one channel or another.
Time periods and trading updates
Where possible, sales updates from retailers should cover the same trading periods as their competitors and be comparable to previous periods. This is particularly true over the vital Christmas period, where retailers in the past have chosen different trading periods to report on.
Conclusion
Like-for-like is a widely used, but often misunderstood measure. Its usefulness to external stakeholders is limited, due to a lack of comparability between retailers’ figures. The increasing importance of online sales and the lack of growth in new outlets could see the metric quickly become obsolete without substantial change and standardisation.
The Retail Think Tank recommends that a set of guiding principles be created for retailers to adopt, allowing external users of the figures to easily assess and compare the underlying performance of companies.
Any set of principles should seek to minimise highly judgemental exclusions from the like-for-like calculation, with only the impact of new, extended or closed stores justifiably excluded. Any measure must take into account online and multi-channel sales, with exclusions only for new websites. The fundamental principles are transparency and clarity. A user of the published sales data should be able to breakdown total sales of a retail business into its constituent parts in order to get a clear picture of the drivers of performance.
The RTT calls upon the industry and leading retailers to work together on drawing up these guiding principles to ensure like-for-like sales remains a relevant metric for the 21st century. Such guidance should recognise that any measure of like-for-like sales is just one of a broader set measures required to achieve a full understanding of the performance of a retail business.
This white paper was first published by the Retail Think Tank. Read it in full here.