Sears closing sign

Are store closings a remedy for what ails department chains?

What will it take to get department store chains, including J.C. Penney, Macy’s and Sears, performing at sales per square foot levels not seen in a decade or more? The answer, according to new research from Green Street Advisors, is store closures and a lot of them.

Around 800 stores in U.S. malls, roughly one-fifth of total anchor space, would need to be shuttered for the chains to reach the same level of sales productivity achieved in 2006. (Green Street, it should be noted, does not see a particularly rosy future for malls either with estimates that over 15 percent will either be closed or repurposed over the next decade.)

Green Street, as reported by The Wall Street Journal, estimates that sales at department stores averaged about $165 a square foot in 2015, about 24 percent lower than in 2006. Over the same period, department stores reduced their collective footprint around seven percent.

Sears Holdings, which recently announced it was closing an additional 10 Sears locations, would need to shutter 300 locations to get back to its 2006 per square foot levels, according to the real estate research firm.

J.C. Penney, whose CEO, Marvin Ellison, has said that store locations are a key element to the chain’s omnichannel strategy, would have to close even more — 320 — to return to the same sales per square foot numbers achieved a decade ago. Sales per square foot at Penney have fallen 37 percent since 2006.

BrainTrust

"There’s no doubt that a wave of mergers and acquisitions has rendered Macy’s way, way too over-stored. I’m amazed that Mr. Lundgren steered the ship clear of rocks as long as he did."

Paula Rosenblum

Co-founder, RSR Research


"We have a fixation on numbers. They are clear, comparable and understandable. Don’t mind that changes to the business model behind these numbers are making them less and less relevant in managing the future."

Mohamed Amer, PhD

Independent Board Member, Investor and Startup Advisor


"The idea that closing stores will increase the sales per square foot in remaining stores is just putting a positive spin on a deep and endemic problem for department stores."

Gene Detroyer

Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.


Discussion Questions

DISCUSSION QUESTIONS:
Do department store chains need to be more aggressive when it comes to closing locations or are these same spaces vital to their future growth prospects? Do you agree that store closings, as suggested by Green Street Advisors, would help department stores return sales per square foot levels to 2006 levels?

Poll

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Bob Phibbs
Bob Phibbs
7 years ago

Yes but it’s complicated. Many got sweetheart deals from developers and local agencies and now some are saying if they close the store, they want the money back. The reality is there are simply too many places to buy too much of the same thing.

Closing alone won’t fix the rotten customer experience at almost all department stores. Not until someone at the C-level owns the customer experience (human to human — not smartphone to cloud, by the way). There’ll just be fewer stores, not better stores.

Paula Rosenblum
Paula Rosenblum
7 years ago

Well, if only that were all it took. There is no one answer for all the department stores mentioned.

There’s no doubt that a wave of mergers and acquisitions has rendered Macy’s way, way too over-stored. I’m amazed that Mr. Lundgren steered the ship clear of rocks as long as he did.

J.C. Penney still has an identity problem. Don’t forget, we’re just back to revenue at the pre-Ron Johnson level, so it’s not like progress has exactly been made.

And Sears is just a dead man walking. The chain has been beaten into the ground in the name of I don’t know what.

But there is also a deeper problem with the department store model in general. They just are too hard to shop. Contracts with merchandise vendors prohibit re-designing the selling space into something more relevant to today’s shoppers. They are, at the moment, exactly what they are called — stores laid out by “department.” But that’s not how people shop anymore. They tend to shop by lifestyle. Curated assortments are a far better solution.

I don’t know how department stores will make this transition. I just know it’s imperative.

Peter J. Charness
Peter J. Charness
7 years ago

There’s gold in that real estate. All of retail needs a rethink of the role/size/location and cost of their stores. There will be a painful transition for many as they make physical locations more compelling to shop, more convenient to pick up at and more cost effective to ship from. With the level of online business in much of retail, the need for all the existing square footage is hard to justify. For department stores it’s certainly a trade-off between convenient locations and financial impact. As Paula points out, a compelling reason to shop a department store is job number one.

Bob Amster
Bob Amster
7 years ago

As it relates to sales per square foot it would make sense, but only if the department store chain can manage to get the customers disenfranchised by one store closing to go to the other store in the general area. This last piece can only be achieved if the chain itself offers better customer service than in the last 20 years. It is a much nicer experience to go to a store where there are associates around who actually know and understand the product, and to actually help customers find, try on and select a product.

Naomi K. Shapiro
Naomi K. Shapiro
7 years ago

The only way to succeed for department store chains (and any business for that matter) is to sell more product at fair prices and pay less for the costs of running the business. Cutting back on the amount of merchandise and the resultant need for less space makes sense, although it’s hard to bite that bullet.

The idea of organizing/curating store merchandise by lifestyle is brilliant. But how will I know where to go and get stockings, makeup or accessories if there are not departments anymore? Oops, I don’t wear stockings anymore (no longer part of my lifestyle) … but how do you put lifestyle items together — outdoor and sports clothing, sports equipment, hiking boots, latte-makers together as part of some people’s lifestyle?

Dave Wendland
Dave Wendland
7 years ago

Closing stores is one measure that may stop the bleeding at some department stores … in the short term.

Honestly, this is a slippery slope. For those giving up retail space and shopper presence, monies will have to be spent to promote the other remaining locations. And if the experience in the surviving locations is not relevant, differentiated and superior to other shopping alternatives, the retailer will be faced with the prospect of closing more and more locations.

Mohamed Amer
Mohamed Amer
7 years ago

We have a fixation on numbers. They are clear, comparable and understandable. Don’t mind that changes to the business model behind these numbers are making them less and less relevant in managing the future.

Of course store productivity is important, but reducing the denominator is only a partial answer. You can also boost the numerator through assortment, layout changes and more empowered associates. And are online sales being considered? Are store metrics misleading in an age of omni-shopping and digitization?

Old paradigms are slow to die but their KPIs never do.

Gene Detroyer
Gene Detroyer
7 years ago

I heard this announcement on the news this morning. The idea that closing stores will increase the sales per square foot in remaining stores is just putting a positive spin on a deep and endemic problem for department stores.

Department stores are no more relevant today than the Sears or Montgomery Wards catalogs were in the ’50s nor the Five & Tens in the ’70s. It is over for department stores.

Department stores are having a “Kodak Moment.” Not in the sense that there is a beautiful picture there, but in the sense of a once great company so wedded to their business model that they refused to see the future.

David Livingston
David Livingston
7 years ago

Its always been this way. When you are a mature retailer that has run out of steam, the only way to improve sales per square foot is to close all the low-performing stores. Then merge with another company that does the same. Safeway and Albertsons followed this path. Pretty much all retailers do this. Some retailers like Walmart will close stores due to high theft, high prevailing wages or union organizing, even though sales per square foot is fine. But yes, close the dogs and dump the deadwood.

Brian Kelly
Brian Kelly
7 years ago

It depends. Some stores are too large to continue to profitably operate due to reduced demand. Some stores are now in the wrong location due to trading area constituency changes. The short-term for those stores is bleak.

If only top-performing stores were retained then the dollar per square foot would go up for portfolio — it’s easy math.

Though Ellison’s POV re: store as medium is very interesting. Will it keep J.C. Penney from closing many stores? Time will tell.

Or as we like to say, “retail ain’t for sissies!”

Cathy Hotka
Cathy Hotka
7 years ago

Closing stores isn’t the answer … a new business model is. Department stores take WAY too long to shop, and customers who are used to instant gratification won’t tolerate the search for departments, the paper coupons and then waiting in line. it’s time for department store execs to start shopping in their own spaces. At my new meeting, SILICONNECT, we’re calling this new model the Uberization of retail.

Brian Numainville
Brian Numainville
7 years ago

Unless department stores are able to become more relevant to shoppers and offer a solid customer experience, unfortunately capitalizing on the value of the real estate by closing stores may end up as one of the only alternatives.

Ken Morris
Ken Morris
7 years ago

I believe department store chains need to look at their square footage sales differently than they do today and need to allocate sales per square foot of their online sales to each store location and convert their stores to be a retail sales location, a showroom and a distribution center. Macy’s is doing $6 billion in online sales with many being fulfilled via the in-store channel and if you add back the allocation of online sales fulfilled via the closest location to the ship to address and then look at the square footage numbers, you see a different picture. I don’t disagree that stores need to be closed, but we need to change some of our thought processes when we look at store performance, including:

  1. Set stores up as distribution points using distributed order management (DOM)
  2. Create the showroom mentality and realize that shoppers are visiting stores to try products before they buy online
  3. Allocate sales by geography and apportioning the stores the online component of sales
Craig Sundstrom
Craig Sundstrom
7 years ago

From a strictly academic POV, GSA is correct: simply pick the average sales you want to have, and close everything below the point that corresponds to. But this is a math exercise, not a strategy: what about fixed costs? What about market presence? What happens as sales continue to decline? And what about the fact that sales per square foot, adjusted for inflation, are only a fraction of what they were 30 or 40 years ago … why isn’t THAT the appropriate benchmark?

Vahe Katros
Vahe Katros
7 years ago

When the cops raid the brothel, everyone is arrested, including the piano player and when malls are failing, down go the retailers.

Look, closing stores is the Occam’s Razor for retailing woes, but we can’t kick the can much longer, the issue remains: how do we turn a local presence into an asset? Shakespeare said something like: “The branch that attacks the tree, dies.” He might have been talking about chain store retailing.

Gordon Arnold
Gordon Arnold
7 years ago

Most stores of any size are tied to leases that require monthly payments for the facilities and maintenance. These fees are increased by the necessary insurances that are structured by company size as well and must be maintained. This overhead is due regardless of occupancy and sales levels. The need for capturing income even in a losing location is important for these and inventory purchase quantity extra scheduling commitments to vendors. So even with lease expirations the need to have open stores to meet turn requirements makes closings a daunting task with usually higher than anticipated losses. In short, closings more often than not, increase the red ink exponentially.

Lee Kent
Lee Kent
7 years ago

Quite frankly I think it’s time to think differently than sales per square foot. We need to be looking at the whole picture, including ecommerce sales, before we make these kinds of decisions.

What are the possible future uses of the store? How much good will is provided to the community just by being there? If you use slower selling stores as distribution centers, can you satisfy your customer better? Can you save on shipping and other fulfillment expenses?

All of this factors in. And that’s my 2 cents!

Donna Brockway
Donna Brockway
7 years ago

I believe it is one of the things that will help department stores stay profitable and relevant. They can then spend time and money on the things customers really want — great selection of items, value-driven prices, exciting and engaging in-store experience and flawless online selection and ordering. They don’t need to have a store on every corner (or every 10 miles). It’s not needed, doesn’t add value and waters down the efforts.