Which retailers will ‘win’ this holiday season? by Michael E. Raynor @FortuneMagazine December 24, 2013, 8:52 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons Photo: Victor J. Blue/Bloomberg via Getty Images FORTUNE — How retailers fare during the holiday season gets an awful lot of attention, and rightfully so. Consumers are in a veritable frenzy, which is reflected in the pointy-elbowed competition among retailers. And as the snow settles, and credit card bills start going out, the temptation to look back and see who “won” will be irresistible. This is all score keeping, however, and it sheds little light on what makes for a great retail strategy. To get at that question, we’ve looked at the ebb and flow of retailers making one or both of two lists — the largest and the most profitable — over the last 20 years. This long-term perspective reveals that although we’ve witnessed the fall of some household retail names and the rise of new titans thanks to new formats, new channels, and new technologies, it turns out that the formula for achieving profitability hasn’t changed much at all. MORE: What Costco can teach you about cash For example, would you have expected that Family Dollar FDO is perhaps the most profitable discount retailer over the last 30 years, and that it has delivered those results on the back of a higher cost model but one that commands consistently higher prices? In other words, competing on “better” trumps competing on “cheaper” even in discount retail. Family Dollar’s experience is stereotypical of great performers. We compared the structure of the advantage enjoyed by companies that finished in the 90th percentile with those that finished in the 40th-60th percentile of profitability over the last 20 years. What emerged was a remarkable tale of stability despite the convulsions that have reshaped the tactical realities of retail in every sector. Click to enlarge. To understand the performance differences between companies in the 90th and above percentiles and companies in the 40th to 60th percentiles, we conducted return-on-assets decompositions between each company in those two groups. For each comparison, ROA is decomposed into four financial ratios: Return on Sales, Other Costs, Gross Margin, and Total Asset Turnover as a percentage of the total ROA advantage. In the above graph, the dark blue line indicates the median percentage of total ROA advantage for each financial ratio, and the light blue ribbon represents the 25th to 75th percentile of total ROA advantage for each financial ratio. You might think that technology has made efficiency critically important, and yes, inventory turnover within the retail industry has increased. But it has not become a differentiator, accounting for the same percentage of total return-on-assets advantage today as it did in the 1990s. Although subject to slightly more year-on-year variation, the same holds true of other business costs. These expenses as a percentage of sales have been trending downward, reflecting the importance of increasing efficiency. But it has not become relatively more important as a driver of a profitability lead. As a result, it remains today, as it has for years, that the retailers that rely on relatively higher gross margin are most likely to achieve exceptional profitability: gross margin continues to account for essentially all of the profitability advantage enjoyed by the most profitable companies. Door busters and deep discounts create buzz but, on their own, they don’t create exceptionally profitable retailers. MORE: The real reason behind Amazon’s booming stock price Although low price and low cost matters, it’s a mistake to think that lower price and lower cost is the odds-on bet for top-flight performance. After all there can be only one price leader, and these days especially, the lowest price isn’t all that hard to find. Our analysis reveals that those retailers that have been able to achieve high levels of profitability year after year have done so by avoiding the fight to the bottom, and instead searching relentlessly for other ways to differentiate, and capturing value by charging higher prices relative to their competitors. Michael Raynor is a Director at Deloitte, where he leads that firm’s Eminence Theme Program. He is the co-author of The Three Rules: How Exceptional Companies Think, among other titles. Robert Del Vicario is a Senior Consultant in Deloitte’s Strategy and Operation practice.