Looking at revenue per employee, we find that the metric is useful for small businesses to use as a benchmark, with notable opportunities in Retail, Consumer Goods, and Apparel & Fashion.
5 Minute Read
What you need to know:
- We break down the revenue per employee (RPE) for the world’s 500 largest US public companies (across 11 business sectors) and provide a framework to use the metric.
- Based on our analysis of 500+ businesses from the Trends Guide to Small Business Growth, we find that new ventures in the Retail, Consumer Goods, and Apparel & Fashion space can run lean and are the most competitive with public comps on an RPE basis.
- The world’s largest companies are able to create massive value across a range of RPEs — from Walmart ($237k revenue per employee) to P&G ($709k) to Exxon ($3.7m) — as long as there exists a sufficient business moat, strong industry growth potential, and a compelling story.
- While useful as a benchmarking tool when starting a venture, RPE is not as valuable as other key metrics as a business grows. We highlight the more important metrics below.
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Revenue per employee (RPE) — the straightforward measure of business efficiency — was thrust back into the spotlight in mid-November with the sale of 51% of Kylie Cosmetics (12 employees) to Coty for $600m.
But does the statistic matter for entrepreneurs? Or is it just bragging rights for companies that scale differently than others?
We touched on the same theme in a recent Twitter conversation with some related topics brought to the fore:
- How much revenue can you achieve with the smallest number of employees?
- When do more employees help vs. hurt?
- What industries run leanest?
For this report, we looked at the revenue per employee for two very different data sets:
- The Trends Guide to Small Business Growth: Over 500 entrepreneurs have submitted data to our growing small business database.
- S&P 500 companies: The benchmark stock market index of the 500 largest US public companies.
After this initial analysis, we came to the conclusion that RPE is a useful heuristic when starting a venture and can be used to quickly benchmark against the existing landscape. However, as a company grows, RPE should take a backseat to other key metrics (such as margin structure and growth) and other considerations of value creation.
(Explore the data here.)
How To Think About RPE
While running a large multibillion-dollar corporation is (🚨Captain Obvious warning🚨) clearly different than running a new venture, the wealth of public company data (e.g., S&P 500 companies) provides an appropriate entry point to draw best practice lessons.
The S&P 500 index of America’s 500 largest companies is split into 11 sectors, including Consumer Staples, Consumer Discretionary, Communication Services, Energy, Financials, Healthcare, Industrials, IT, Materials, Real Estate, and Utilities.
The table below shows key info — including the average RPE — for each of these sectors. (We calculated the figures by taking the average of highlighted data points for all companies within each sector.)
The sectors with the highest revenue per employee are Real Estate and Energy, which show respective average RPEs of $3.3m and $2.9m; the lowest RPEs on the list are for Consumer Discretionary and Industrials, at respective averages of $403k and $357k.
Based solely on RPE, Real Estate and Energy may seem better than Consumer Discretionary, but the comparison is clearly not like with like.
The Real Estate sector has the lowest average number of employees across S&P 500 companies because it is almost entirely populated by real estate investment trusts (REITs). As a specific form of investment vehicles, REITs employ few real estate professionals directly; rather, most services related to real estate management are outsourced to third parties.
Likewise, the specifics of the Energy sector make its RPE of $2.9m difficult to compare to the RPE of any other sector. For example, energy companies make significant capital investments; their capital expenditures (CAPEX) represent 30% of their revenue vs. an average of 8% across all sectors. Energy companies also employ fewer employees than many other sectors, but those employees are highly paid.
As a shorthand for the efficiency of a business, RPE is better suited for industries that require significant human capital (“people, you’ve invented people”).
Consider a firm like Walmart (Consumer Staples), which can hire and fire employees relatively quickly. A large round of layoffs could briefly juice RPE (since the denominator, “E”, falls) but hurt sales moving forward.
Conversely, an IT firm adding qualified employees may see RPE stagnate or fall, but over time the metric will rise as new hires bring innovative products to market.
Takeaway: When measuring RPE, be sure to find a suitable benchmark (particularly for human-capital intensive sectors) and understand how the metric changes over time.
Which Small Business Categories Show Competitive RPEs?
Before beginning our analysis of the Trends small business database, we acknowledge the challenges of comparing a small business to a mega-cap company.
In the table below, we distilled the small business database from over 500 companies down to 250 across 11 of the most popular submitted small business categories.
These categories do not map cleanly onto the S&P sector classification, so as a point of comparison we’ve picked a representative company for each small business category (feel free to change the comp in the Google sheet).
From our analysis of these companies, we find that the small business categories with the highest average RPE are retail ($388k), consumer goods ($340k) and apparel & fashion ($280k), all of which have single-digit teams on average. Further, these are the business categories that have most sharply outperformed the select public market comp RPEs, including Target ($216k), PepsiCo ($247k), and The Gap ($121k), respectively.
These business categories do not come as much of a surprise for anyone that has closely followed the Shopify-ification of e-commerce. The tools to launch a DTC consumer play are available to anyone with an internet connection, and such an operation can run very lean.
Also of interest is something we touched on above. IT has greater leverage to increase RPE even as the firm grows bigger based on the economics of delivering software innovations. The small business Computer Software ($161k) and Info Tech & Services ($121k) categories lag their larger comps in Salesforce ($421k) and IBM ($220k) on an RPE basis.
Takeaway: For new ventures, Retail, Consumer Goods, and Apparel & Fashion companies can run lean and show competitive RPEs vs. large public companies.
The World’s Largest Companies Show A Range of RPEs
Looking at the RPEs of the S&P 500’s largest companies (below), we find that it’s possible to become a world-class company with a range of RPEs.
In this elite group of companies, Exxon ($3.7m) and Apple ($1.9m) have the highest revenue per employee, while Home Depot ($269k) and Walmart ($237k) have the lowest.
While RPE for these businesses may differ, the top companies all share common traits:
- Business moats
The top companies in the world have strong business moats.
Apple has the (pretty much luxury) iPhone ecosystem. Amazon has distribution centers, Prime, and AWS. Walmart has an incredible logistical retail network. Facebook has social network effects. Visa and Mastercard have financial network effects. Alphabet has search. Etc.
While some of these companies operate “more efficiently” on a per employee basis, the ability to create massive value is possible across a range of employee headcounts (and RPEs) if a business moat exists.
- Industry Tailwind
Markets reward companies with high expected future earnings growth. As the digital economy consumes more of the world, it should come as no surprise that 10 of the top 20 companies by market cap fall into either the IT or Communication Services sectors.
Aswath Damadoran, an NYU finance professor, is the capital market’s valuation Yoda and loves to frame his analytical approach as “Narrative and Numbers”:
“I see a world increasingly divided between number crunchers, who have abandoned common sense and intuition in pursuit of data analytics and complex models, and storytellers, whose soaring narratives are unbounded by reality. Each side is suspicious of the other, the storytellers convinced that numbers are being used to intimidate them and the number crunchers secure in their belief that they are being told fairy tales, but you need both skills in investing and valuation. I think of valuation as a bridge between stories and numbers, where every story becomes a number in the valuation and every number in a valuation has a story behind it.”
A robust market valuation ultimately needs to survive both a numbers — and story — audit. At present, the names listed in the table above pass the smell test.
To be sure, this “highest market cap” list is not static.
The average lifespan of a company on the S&P 500 is getting increasingly shorter. It was 33 years in 1964 and is projected to be only 12 years by 2027.
One thing you can be sure of, though, is that the companies that break into the top of the index will have a strong business moat, industry tailwinds, and a great story.
Takeaway: RPE is not a determining factor for the world’s largest companies. Moats, narratives, and industry opportunities drive performance.
What RPE Doesn’t Tell You
The next point here applies just as much to “revenue” as it does to “revenue per employee.”
Anyone can sell $1 for $0.80. But — as money-losing unicorns have recently discovered in public markets — the goal of a business is to make money.
Does your revenue flow through to the bottom line?
Returning to the list of individual S&P 500 companies with the highest RPE, there is one specific company that highlights the above point — AmerisourceBergen, one of only two non-energy/real estate plays in the top 10.
Over the past 12 months, AmerisourceBergen’s RPE ranks 5th among S&P 500 companies, at $8,352,981.
Its total revenue — $180B — ranks 11th across all S&P 500 companies, yet the company’s market cap (as of 11/29/2019) is only $18B (a paltry ratio of 0.1x revenue).
The company has a comically low net margin, 0.5%. As a healthcare distributor, Amerisource faces cutthroat completion, a brutal regulatory environment and — frankly — cruddy business economics.
This isn’t a knock on the company. That’s the business model, and it works.
But, as this case shows, just looking at the RPE will really not tell you much.
For this reason, as businesses grow, many other metrics take precedence.
Here is a brief (and non-exhaustive) summary of general non-RPE business metrics that are good to know.
Takeaway: Be careful when using RPE. It does not tell you much about the business structure and how a dollar flows from the top to the bottom line.