BEHIND THE NEWS: Use of commissioned staff sets Gregg apart from rivals

June 27, 2005

H.H. Gregg may be a pipsqueak compared to goliath Best Buy Inc. But a peek into the Indianapolis company's financial statements shows it's no alsoran when it comes to profit margins.

In its latest fiscal year, the electronics and appliance retailer posted an operating profit (earnings before interest, taxes, depreciation and amortization) of 4.8 cents for every dollar in revenue, according to IBJ's analysis of the private company's financial statements.

That margin is just shy of the 5.2 cents reported by Minneapolis-based Best Buy and far superior to the penny reported by Virginia-based Circuit City Stores Inc.

"We have a competitive operating margin, and obviously we have to continue with that, and enhance it where possible," said Gregg CEO Jerry Throgmartin, whose company has $803 million in annual revenue, less than 1/30th that of Best Buy.

Even more impressive: Gregg achieves those numbers despite employing an extensively trained, commissioned sales force-an expense its top rivals have chosen not to shoulder.

Circuit City used to have a philosophy similar to Gregg's. But when its performance slumped, the company in early 2002 became desperate to economize. On a winter morning workers call "Bloody Wednesday," the chain axed 3,900 commissioned salespeople, replacing many with lower-paid hourly workers.

Observers say the chain was chasing a trend. "The retail sales floor has clearly experienced a paradigm shift, with key retailers moving away from a commissioned sales environment," Jeff Unterreiner of Assurant Solutions, an Atlanta-based marketer of extended-service contracts for retailers, told This Week in Consumer Electronics last fall.

Throgmartin can see the rationale. "It's cheaper and, to a great extent, makes people a lesser part of the equation," he said of the approach. "In our model, if you are wanting to add stores quickly, we have to get enough people ready to execute what we do. That says you've got to grow at a pace where you can have competent people performing for the consumer."

Even so, Throgmartin isn't about to put the kibosh on commissions. In fact, he and his management team believe their investments in training and commissions give Gregg a competitive edge, boosting customer satisfaction as well as sales of higher-end, higher-margin merchandise.

"With a commissioned sales force, they wait on customers, because if they don't wait on customers they don't get paid," he said. "An informed customer in many cases will buy a better product. If I look at two products-one is $299 and one is $399-and no one explains what the product will do for me, why would I pick the $399 product?"

Despite the higher costs of commissioned salespeople, Throgmartin said, Gregg doesn't have higher prices. Instead, he said, it offsets those costs with lower corporate overhead and higher sales.

A key part of the strategy: hiring highly motivated, career-oriented employees, according to papers Gregg filed with the Securities and Exchange Commission in January as part of a restructuring that shifted majority ownership from the Throgmartin family to Los Angeles-based investment firm Freeman Spogli & Co.

Rather than rely on young people eager for part-time work, as many retailers do, the 60-store chain employs only about 170 part-timers, or just 6 percent of its work force of 2,800, the filing shows.

Further, Gregg believes sales staff turnover is significantly below that of competitors', according to the filing, which doesn't provide figures.

To bean-counters, relying on seasoned, full-time employees might seem too costly in the cutthroat retail game. But that's not Throgmartin's view. He said the 49-year-old company was built on a foundation of customer service, and he's not about to yank out the underpinnings now.

"When you look at customers' dissatisfaction with whatever kind of retail, 'I couldn't get waited on' is at or near the top," he said. "If we provide the information that benefits the consumer, that will be good for us. It is in many cases the tiebreaker in where they choose to buy."

Good times, good pay

Proxy season ended months ago for most public companies. But retailers live by their own calendars, and Finish Line Inc.'s proxy just hit the streets.

CEO Alan Cohen received the most annual pay. His salary and bonus for the fiscal year that ended in February was $1.05 million, up 13 percent.

Most of the top brass saw increases, a reflection of prosperous times. Finish Line shares have surged 226 percent over the past two fiscal years.

Even while receiving his $1 million, Cohen left money on the table. Because he already has a big ownership stake, the proxy says he continued his long-standing practice of not accepting stock options.

Options can rapidly lead to riches. President Glenn Lyon, who joined the retailer in 2001 and received salary and bonus of $702,000 last year, already has amassed an option stockpile worth $2 million.
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