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Are retailers cutting their way to profitability or slowly bleeding to death?
If you’ve been around the retail industry for any amount of time, you’ve no doubt been a part of at least one conversation on how there are just too many stores for the market in the U.S.
Studies have pointed to the amount of square feet of retail space per capita in the U.S. compared to other developed countries around the world. No one comes close to America. Of course, large retail bankruptcies and subsequent store closings have been part of the domestic retailing scene for a long time. Last year, well before the novel coronavirus pandemic broke out, retailers closed a record number of stores, according to Coresight Research.
The expectations for this year, again before the outbreak of COVID-19, was that the industry would likely set another record. In that regard, at least, the results didn’t disappoint.
It’s not uncommon for retailers to shutter stores that are not performing up to expectations. What some question is the rationale that major chains that close dozens and even hundreds of stores use to explain the wisdom of their moves. The thinking typically goes something like this: Closing stores will reduce costs and an increased focus on digital sales will provide a more profitable way to serve markets where doors are closed. In reality, however, that isn’t what typically happens. Experience reminds us that you can’t cut your way to growth and profitability in the retail world.
A Wall Street Journal article yesterday addressed the topic and the continuing cycle of store closings by national chains.
“No retailer ever announces one round of store cuts — it’s always the precursor to a store bleed,” Simeon Siegel, a BMO senior analyst, told the Journal. “Most companies we looked at had lower revenue and profit than before they started closing stores.”
Mr. Siegel said that when stores are closed, retailers often have to increase marketing expenses to try and hold onto market share via their digital business. The result is typically not good from either a top or bottom line perspective.
- Retail Chains Shed Stores, but It Isn’t Good for Business – The Wall Street Journal
- Will store closures worsen in 2020? – RetailWire
- Will a smaller Macy’s be a better Macy’s? – RetailWire
- What will retail look like if half of department stores close? – RetailWire
- The coronavirus will accelerate retail’s ‘collapse of the middle’ – Retailwire
Discussion Questions
DISCUSSION QUESTIONS: Do you think retailers that announce large numbers of store closings are often simply putting off their ultimate demise? How can retailers determine the proper number of stores the market will profitably support in balance with their digital operations?
Poll
BrainTrust
Large store closings are a sign that the retailer’s overall demand is dwindling. The pandemic has made struggling chains even more vulnerable. While some categories have prospered like grocery and discount department stores that are considered essential businesses, some categories have struggled like apparel and more specifically business apparel (e.g. Men’s Warehouse) as many corporate employees are still working from home and don’t have a need for business attire.
Trimming store counts is a smart strategy for retailers to adjust to changing market dynamics, and so as a strategy it’s sound. The massive reduction of stores, as described in the article, is another animal all together. When we see a dramatic reduction of stores it’s often a precursor to larger financial failure or a complete reset of the business. At the point at which a retailer is shedding a significant number of stores, survival is usually the big driver – along with lease expirations. I doubt that there is a formula or a single approach to massive store reductions since each retailer’s unique circumstances will determine the path.
It is all about about achieving the balance of closing stores that do not perform to a certain level and reducing the infrastructure required to operate the remaining open stores profitably.
In many cases, retailers can’t cut centralized costs fast enough to keep up with the lost sales from store closures. And when these stores pull out of markets entirely (think Sears), they become irrelevant in the minds of shoppers who might be considering omnichannel options. While it makes sense for stores with hundreds of locations to prune the least profitable sites, the pace of closures from some national chains looks like a harbinger of doom.
It’s no accident that stores like Walmart and Target — both with massive physical footprints — were already leading the pack on omnichannel sales. The pandemic has only solidified their market position, thanks in part to all those locations offering curbside pickup of online orders.
Retailers proactively closing stores as part of a larger plan to manage inventory differently will win. Many of the retailers who are closing stores to purely control expenses are probably on a long road to a bad place unless they can operate differently. There will be a demand for stores and in-person shopping for a long time. The secret to long term success will be having the right mix of store/experience center/fulfillment center in a single location.
There continues to be a secular decline in brick and mortar retail sales, as consumers shift to more online based fulfillment. This move from analog dollars to digital pennies is a structural change that will not be solved by simply closing stores, but instead by taking a deep assessment of unit economics, as pallets to stores is not eaches to homes. Also, diversification to find other sources of revenue will be key. It has taken Amazon close to 25 years to start to get this right.
Savvy retailers are in the process of doing everything they need to do to survive in this environment — opening stores, closing stores, switching formats, deploying technologies, and re-examining their competition. The retail companies I worry about are the ones that are acting like it is still 2019.
Sadly, there aren’t many savvy retailers today — maybe there never were.
Retailers who close large numbers of stores are thinking of short term solutions, which rarely works. Why did the stores fail? The retailer will say not enough traffic and not enough sales. I have often had the conversation and proved to many clients that stores fail because of poor performance, leading to less traffic and lower sales.
People who go to the store go because they either like to shop or want to see and try the item before making the purchase. But what happens when they go into a store with no associate available to help them, or worst yet, a rude associate who can’t be bothered? The customer leaves. They may come back one or two more times, but if the experience is the same, they’re done. That same customer will tell their family and friends, and when they find a competitor they like better not only will they shop there but most likely so will the same family members and friends they talked to about their horrible experience. So if a retailer wants stores and wants them to be successful, invest in good people. Hire enough associates and make sure they are well trained. Having fewer stores is fine, but every store should be a place that customers look forward to shopping and often return to because of the outstanding customer experience.
Lack of performance is often a mere symptom of a deeper root cause – lack of strategic alignment at the leadership level, poor execution of the strategy, talent issues… Closing stores without identifying and addressing the root cause of the issue doesn’t solve much unfortunately.
There is overcapacity in the U.S. market, but it is not quite as bad as some of the studies make out as the numbers for the U.K. and elsewhere are erroneously low and mall space is often mistakenly used as a proxy for total retail space. The real problem with the U.S. is that there is more bad retail space than in other countries and a lot of that is underperforming. Cuts in store numbers are needed, but so too is a focus on building or rebuilding the types of shops people want. And part of this means format flex so retailers have different types of stores for different types of locations. The one-size-fits-all cookie-cutter approach to stores is dead!
There’s no question that North America is/was over-retailed and store closures were going to be an inevitability as omnichannel gained further ground and D2C also ate up marketshare. The pandemic has simply accelerated this. What retailers need to do now is optimize each channel, be it store or digital, to ensure they can extract every dollar of profit they can from every order. That could mean using a break-even or unprofitable store as a micro-fulfillment center to help lower delivery costs, or taking a hard look at their SLA with customers to ensure they are not “over-delivering” on speed and convenience when it’s not necessary and makes orders unprofitable. A holistic approach to supply chain efficiency and customer experience is needed and not knee-jerk reactions like across-the-board store closures and free same-day shipping.
Closing stores doesn’t have to be a bellwether for imminent disaster – but in most cases by the time the retailer decides to make the cuts it’s too late to save the profitable locations. When store closures are made as a way to cut costs in a struggling company, marketing is typically cut as well. That’s when the real problems start.
Customers are tied to their homes and out of their normal routine. Acting like the past eight months is forever is to continue the hackneyed retail narrative – “if the store closes, they go online.” “We don’t need stores.” “All anyone wants to do is shop online.” If you took Amazon and a few other players out of the mix, you’d find most business does not transfer to online when stores close. In fact the opposite happens. The only way these struggling retailers will try to woo them to their websites is bound to be more discounts and promotions.
If C-level execs just realized that the store is the hub everything else springs from, they’d take the experience within a store’s four walls seriously. You can’t close your way to knowing who your customer is or discount your way to margin. Hire people who don’t look down on working retail, give them training on how to engage a jaded shopper, discover their interests and bond so your experience stands out along with digital initiatives and you’ll have something like Starbucks, like Apple, like Lululemon, like Container Store, and more.
With good back office technology retailers can know what their customers purchase, in what quantity, whether they do so online or in-store, and whether they pickup online orders at the store or have them delivered. With that information retailers can reconfigure their stores to include more back-of-store space for fast moving products or those products in demand locally. The rest of the store can be designed to enhance consumers’ in-store experience. This takes time, money and creativity and it all hinges on the back office data and analysis of that data. Closing stores is not the path for climbing out of a hole.
We have a gazillion years of experience here on RetailWire. Here is the question my BrainTrust colleagues — what retailers ultimately survived years after closing hundreds of stores?
I’m thinking, I’m thinking…
When a retailer loses hundreds of stores, they will ultimately describe it as “closing non-performing stores.”
Did hundreds of stores become “non-performing” all at once? Or were some “non-performing” six months ago? Twelve months ago? Two years ago? Five years ago? If so, why weren’t they closed then?
Absolutely. Sure all retailers were over-stored, but we also know that closing too many stores actually hurts online business. But what choice do they have? This “double-whammy” has spelled a slow death knell for retailers all century, from J.C. Penney to J.Crew to Gap to Macy’s to Toys “R” Us, and on and on. It has been called “circling the wagons” by many, including me. It’s just a matter of time.
Just like cutting staff during hard times, you’re much better off going deep and moving quickly. Define the successful company you’ll be in the future and go there NOW. A slow bleed never works. The issue is most companies are driven by what Wall Street thinks rather than what they really need to/should do. Let’s face it, other than the huge behemoths like Walmart, Target, Amazon, Best Buy, Costco, Home Depot, etc., retail of the future is two things: smaller and better. Take the hit now, rip off the Band-Aid and welcome the new, 21st century you.
This topic is a much different story in 2020, of course. Just looking at the permanent closings so far, including more than 40 percent of Black-owned businesses having closed this year (staggering!), it’s clear that no small business can stay in business with no opportunity for revenue (e.g., due to COVID-19 shut downs). However in “normal” years in the past, a network analysis of existing store performance versus anticipated growth opportunities has helped determine the best way forward. We are still over-stored in many metro areas, so expand cautiously these days.
We should all hope that current retail closures, along with the potential of more COVID-19 mandated store closures (and also along with a potential minimum wage hike) will not not turn us into a “C/W/T” — Costco, Walmart and Target dominant retail world.
Rich, I think it’s been a C/W/T world for a while and we’re just living in it. Department and specialty apparel stores have been struggling for years, not just during this Year of the Plague. That’s not to say that a better model can’t emerge — think Amazon for one.
As I’ve been speaking about and writing about (in fact chapter 8 of my book “Optimizing to Extinction” focuses exclusively on this topic) for many years, show me a retailer that is closing a lot of stores and you’ve likely shown me a retailer that has a brand relevance and remarkability problem, not a too many stores problem.
It’s been clear for many years that some retailers need fewer, reimagined and differently located brick and mortar operations. But let’s be blunt. Closing stores does precisely zero for customers. And bailing doesn’t fix the hole.
Closing stores or optimizing the fleet? Most retailers spend enormous amounts of time and resources analyzing sites where they want to open a new store. I would argue that closing a store requires at least the same amount of effort, if not more. Looking at markets holistically is critical when they decide to close a store. This is how they can understand the relationships between their existing locations, competition, traffic patterns, and digital activity to name a few factors. There are a lot of variables to consider when solving this problem. The goal, obviously, is to determine which closings will have the least impact on overall market share and company performance.
Location technology tools have a big part to play here. Retailers are using them to predict sales transfer, or which stores customers are more likely to shop at in the chain rather being lost to the competition. They can examine the relationship between online sales and store locations again informing better decisions about how to contract in a market with the least negative impact to their brand. They can see where in a market their sales are coming from, and what locations are most important to their customers. The bottom line is that closing a store is not a matter of selecting the worst preforming store, it requires strategic thinking, market level analysis and local data to make the right decision.
Retailers will always have a series of store closings and openings. That is a natural process of growth and repositioning of its assets, in the form of stores. Consumers’ shift to online purchases is not only accelerating the juggling of store closings and openings but is changing the characteristics of the expanding role and function of future stores.
Massive store closings signal desperation instead of thoughtful planning for growth. Some pruning in the garden is necessary, so resources are used optimally for a more vibrant and robust crop.
As I teach my students, cost control is (at best) a short term financial boon. It never ever sets a company up for the future. Because the only way to have a future is — high demand for your products now and in the future.
So, many of the retailers attempting to cut their way to company health are setting up their own demise. At other times, trimming a few stores is smart — stepping back from poor decisions.
As observers how do we know the difference? It’s difficult. But we do need to always remember: demand for your offering is the only possible way to have your company be healthy in the future. Retailers should focus more on THAT part of the equation than on the cost equation.
Retail and retailers as a whole operate inside a well-padded insulated chamber of circular thinking. Aiding and abetting illogical logic as a path to their ultimate demise. Which in many ways is the way we as humans run and forecast our lives from the confines of our own insular brains. Retail has been and still is an analog business, steeped in the principles of relying on the comfort of historical data or in-the-moment sales data as a decision-making framework.
Those retailers who have crossed the chasm to digital have been required to learned new tools, circumventing the tried-and-true logic they once relied upon for the past century or so. Determining the proper number of stores the market will profitably support in balance with their digital operations is an analogous throwback to the comfort of historical retail. Time for retailers to hire a new breed of digital natives, savvy in AI-enabled predictive analytics to build proprietary retailer-specific, future-casting, forecasting models as a unified digital and brick-and-mortar retail business model.
When brands start disappearing from communities, they become “out of site, out of mind” and customers stop shopping them. That is why this strategy doesn’t work.
As part of any business transformation and restructuring, retailers have to right-size their store fleets. The over expansionary strategies of the ’90s and ’00s and the emergence of digital commerce has significantly impacted the number of retail stores a company needs.
Store consolidation strategies to free up liquidity and mitigate long-term debts are major components of a business restructuring. However, without a parallel strategy to drive improved assortments, a better customer experience across channels, and a way to reimagine the retail brand, mass store closures may buy you time, but ultimately are a losing sum game.
Brand equity matters and the optics of mass store closures without an accompanied transformation plan only leads the retail brand to irrelevance in today’s customer’s mind.
Yes, America is “over-stored,” but not so much in units as in square footage. Too many stores are too large and their leases are too long. This adds up to a creeping decline in relevance for the spaces. Many retailers wind up keeping large, underperforming stores open because it is less costly than closing them. At least those locations provide brand presence and some top-line contribution.
Closing lots of those stores may stanch the bleeding, but those retailers also suffer catastrophic loss of market power and contact with loyal shoppers. It is unrealistic to expect in-store sales from those locations to shift even mostly online.
What we are really witnessing, I think, is the “death of the prototype.” Wise retailers will replace excessively large stores with smaller, more locally-relevant versions that are less costly to operate, more convenient to access, and optimized for improved experience and curbside pickup.
Closing a bunch of stores generally isn’t a good sign, despite any spin put out that it is…,
It depends, of course, on the nature of the closings; closings, per se, aren’t a problem. OTC regular evaluation of store performance is a function of a healthy and well-managed retailer. (In the past, this meant closings balanced by openings, but nowadays the latter isn’t necessarily forthcoming.)
But yes, a retailer that finds its optimum base constantly shrinking may start to notice a pattern.
Large store closings are a sign of desperation and financial pressure. Often pitched as part of a process to reduce costs, control inventory, and focus on markets with a stronger customer following. Although this may vary by retail segment and product categories served, it’s rare that this approach is part of a plan to drive growth or to solve any problems other than to stop the bleeding of cash.
Most retailers find that when they have a store footprint in a local geography, their digital sales increase. This is especially true of younger specialty brands experiencing growth. Likewise, large retail brands often find that when they close a store, digital sales in surrounding zip codes decline.
Why? Most likely because customers perceive the store closing as a move to “leave the market” and therefore they shift their shopping habits to other brands.
That said, the process of closing stores is a natural one for retailers. Not every store will remain profitable forever. Retailers need to rightsize their store footprint periodically to optimize cash flow and inventory so it’s not an automatic sign of despair for a retailer to close a small number of stores at a time.
With very large retailers, we’ve seen examples where closing hundreds of stores is an absolute necessity to survive or emerge from bankruptcy. In those circumstances, the analysis would show that the retailer was just too large to sustain any profitability and/or was under a mountain of debt they incurred to sustain those stores. Sure, in those cases it’s necessary to endure mass closings, but it also is indicative of the difficult time ahead the brand will have to endure to survive.
This year has been rough for many industries, including retail, but digital commerce has stood out as a bright spot and helped many brands not just survive the pandemic but thrive. For example, today Walmart announced that their e-commerce earnings rose 79%. Companies should take this as a sign that they need to be investing in their digital platforms in order to meet customers where they are.
Retailers must continually evaluate the costs and benefits of maintaining a brick-and-mortar presence. Ultimately, nothing will be able to outdo in-person interactions, especially for large purchases that buyers see as investments, but digital operations will only grow. Retailers need to have ensured they have the right blend in order to remain competitive.