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Revenues Before Costs: Is Your Company Top-Line Driven?

Referenced by a Shopping Mall Developer and Operator

Americana at Brand 01

The packed Americana at Brand Shopping Mall, Glendale, CA, U.S.

I have recently been forwarded a comment from Rick Caruso, founder of Caruso Affiliated, a private real estate company based in California which owns 2 of the most productive shopping malls in the world. Here’s the excerpt I wanted to share with you:

“My goal as a real estate developer is a pretty simple one: create spaces that are so pleasant and so central to a community that people want to go there to spend time together.
It may sound trivial, but that extra foot of sidewalk makes a huge difference. Without it, our guests would have been constrained between the storefronts and the parked cars. Instead of leisurely stroll down the sidewalk, they would have felt claustrophobic. That’s a small item that can be easily overlooked in a project of this scale.”

“But, we remembered to parse every little detail. Another example – during our corporate training and on-boarding process, we emphasize the need for every staff member to pick up any litter they see as they walk the grounds of our properties. The same is expected of an entry-level valet attendant or a senior executive (and even the CEO).”

Why, you might ask. The mall evolves the neighborhood with its mix of entertainment and shopping attractions, turning itself into the epicenter of the surrounding community. Many will say that that extra foot of sidewalk is (too) costly and simply unnecessary. Shorter-term, it simply signals higher CAPEX and maintenance costs.

While costs are salient, tangible and undesirable, in the context of a shopping mall behemoth and of overall customer experience, wider sidewalks are invisible. Once interwoven into hundreds of other design and executional details, more space translates into more frequent, qualified traffic, i.e. the most important leading indicator to more revenues. Shopping malls are in the business of “selling sales” to retailers. Their main job is to bring qualified public to spend time in the mall. Smart, long-term oriented shopping mall owners trade obvious short-term profits for the opportunity to build their stronghold, or even better, the community’s second living room. Highly productive malls (measured in sales per sq.ft.) have negligible vacancies, command higher occupancy costs and lease-spreads. They also demand special, harder to find land lots, cost much more to build and to operate. Returns-wise they might seem similar, but the longer your investment horizon, the more important they become as top line performance is usually the key driver of future profits. You wouldn’t be looking for a great year, or three-year sprints, but for a great marathon, i.e. great risk-adjusted returns in the long run. After all, who wouldn’t come back to have a good time?

Top line generation can be more relevant – and a leading indicator to healthy and sustainable future returns – than short-term bottom line in most businesses. Interestingly, it’s quite rare to find top-line driven leaders that embrace lean operating standards. And sure, many businesses demand more of a bottom-line approach, especially the low-margin, high-turnover ones.

That said, the company’s shopping malls are the neighborhood’s big stage, where people go to have a good time with their family and friends. With such care, people feel embraced and end-up up-spending. One could argue that Caruso has the advantage of being a privately held company (with a defined controlling shareholder involved running the business). And maybe he does. But in truth, sometimes public companies have a shorter-term, pure bottom-line, quarterly orientation simply because the people that run it never thought there was another way to go – and were entrapped by their incentives. Something for us to think about.

Interesting Reading: Michael Raynor, co-author of The Innovator Solution’s with Professor Clayton Christensen, wrote an interesting book called The Three Rules – How Exceptional Companies Think in which he highlights a few top-line driven companies’ stories. His three rules are:

  1. Better before cheaper: don’t compete on price, compete on value;
  2. Revenue before cost:  don’t drive profits by cutting cost, instead find ways to earn higher prices or higher volume;
  3. There are no other rules: view all your other choices through the lens of the first two rules.

If you are more prone to 15-minute talks, don’t miss the opportunity to getting acquainted to some of his examples in the video below.