BrainTrust Query: Zombie Stores and Zombie Departments
By Ted Hurlbut,
Principal, Hurlbut & Associates
There’s been
quite a bit written over the past few months about retailers reducing
inventories to better align sales in the wake of the business downturn,
and of assortments being cut back as well. But as I’ve traveled stores
in the last month or so, particularly in the couple of weeks as we
start into the summer clearance season, I’ve been struck by the impact
these reductions have actually had on stores themselves.
Go into just
about any discounter (Wal-Mart included), category killer or other big
box, and it’s hard to overlook. Racks with only a couple of pieces on
them. Shelving below display stock with only one unit, if that. Twelve
inch peg hooks with only one or two units in front, and ten empty inches
behind. Shelves that are bare, corners that look like time forgot, completely
empty floor space as a result of racks and other fixtures having been
pulled off.
In stores ranging
from 20,000 square feet right on up, empty space. And you can almost
hear the question being asked in the corporate headquarters: If business
doesn’t bounce back, if this is this the new baseline, the ‘new normal’,
if we no longer need all that inventory, what are we going to do with
all this space?
This recession
has created zombie stores, stores that appear to be alive, but that are
really dead. In good times, in every chain there are below average stores
that only generate 70 percent or 80 percent of the average store, but
are still four-wall profitable. In this downturn, with sales in some
of these weaker stores off by as much as 10 percent to 20 percent, these
stores are now four-wall cash drains.
Every major
retailer is pursuing every opportunity to renegotiate lease terms but
not every property can successfully be renegotiated. What’s
left are zombie stores, space that can’t pay for itself, and retailers
aggressively seeking to reduce expenses even further in those stores
to minimize the cash drain.
But the issue
doesn’t end with zombie stores. The recession has also created zombie
departments. In every store, there are departments that generate sales-per-square-foot
that are only 60 percent to 70 percent of the store-wide average. In
good times, if the cost-per-square-foot in these departments was fully
loaded, they’d be marginal four-wall contributors at best. Now, they
are also cash drains, and in many cases have been further paralyzed in
their ability to generate sales by deep inventory reductions in both
depth and breadth.
And then there’s
the space throughout the stores where there used to be racks and fixtures,
that now sits idle and isn’t generating any revenue at all.
Some retailers
have been taking steps to address this issue, particularly Wal-Mart and
other discounters who were rapidly expanding grocery departments long
before the recession began. Other retailers have increased ownership
in unrelated, high-impulse items. But for many others still, the issue
remains unresolved, without any obvious answers.
Discussion Questions:
How will the ongoing inventory rationalization reshape square footage
allocation at the store level? What should retailers, especially larger
ones, be doing with the excess floor space?
As consumer demand starts to work its way back from the bottom, the stores that have overreacted on inventory pullbacks are going to have the toughest time recovering. It’s one thing to manage inventory more tightly in a downturn, it’s another thing entirely to “slash and burn” indiscriminately. To some degree, the gaping holes in stores’ assortments and out-of-stocks on basic replenishment items have contributed to the sales slump.
Long-term reallocation of space is a different challenge, one that good retailers should be examining regardless of the economic climate. It’s true that stores like Target have an opportunity to speed up their grocery offerings by cutting back on unproductive space elsewhere, but these kinds of moves need to be motivated by smart long-term strategy, not just on which way the economic winds are blowing.
I have said this and will continue to say it…the reductions in inventory are a disaster in the making for this holiday season.
Retailers will still panic after Black Friday and take heavy discounts–or the customer will not shop. Come December 15, retailers will be out of stock on the things consumers want (and even some that are secondary substitutes). And with an “all Asia all the time” sourcing strategy, there won’t be a thing retailers can do about it.
The net could be the worst of both worlds–heavy discounts driving down gross margin dollars and out of stocks irritating consumers and also depressing the top line.
I hope I’m wrong, and that the smartest retailers are hedging their bets, at least holding some inventory in the DC for replenishment to hot stores.
I still remember New Year’s Eve 1999-2000. I was working for a party supply retailer. Our seasonal buyer was really happy that she sold everything out to the walls. Unfortunately, she also left a LOT of dollars on the table because she under-bought.
Most had way too much duplication. Does the consumer “demand” 12 variations of a black pullover? Doubt it. Smart merchants will aggressively manage SKUs even if it means creative masking of former sales space. The days of “Sex and the City” shopping do not seem to be on the horizon.
The current economic challenges present an opportunity for retailers to restructure their inventory management practices. That does not, however, mean that empty shelves necessarily equate with good business. As any consumer will attest, walking into a store and seeing open shelves suggests that store does not have what you will want to buy and in fact may be in trouble as the business as a whole. No, retailers will have to restructure their merchandising approaches, to ensure that they carry the right inventory and show enough abundance to reassure consumers.
So what is the right inventory? I understand that carrying 12 varieties of black sweaters may not be profitable, but I would suggest a different lens through which to analyze inventory needs. That lens is best customers. It is critical that retailers stock the necessary items for their best, most profitable, most loyal customers, in order to ensure that those customers maintain an active level of frequency in their store.
If this inventory challenge presents an opportunity for stores to become more best-customer focused, then this current economic crisis will have played a valuable role.
The worst thing a retailer can have is empty shelves. It doesn’t give the impression that you’re doing a lot of business. It gives the impression that you’re going out of business.
Clearly, there’s a huge opportunity in SKU rationalization and serious category management. There are way too many similar products out there–the same argument that’s been around for decades. I agree; slash and burn is not the answer. But more retailers need to get the raw data and do some analytical soul searching In other words, ask the question: “Do I really need this item?”
As to additional space, I’d like to see more creative merchandising–more attention to visual presentation, new categories and maybe “pop-up” departments. Don’t tell me that can’t work in grocery. I know it can.
With the exception of a very few retailers, inventory management has been a huge weakness for the industry. The “buy enough to meet sales goal” philosophy, without considering the consequence of excess inventory, has hurt the industry for the last decade or more. This philosophy has not just led to net margin deterioration. It has taught their customers not to buy anything at SRP. As each year has gone by, the discount threshold to get shoppers attention has only gotten larger and larger.
The retail industry must learn how to deliver revenue without cutting margin and the only way to do that is to control inventory. Only when retailers understand that selling one item at SRP is as good, if not better than selling two at 50% off.
As far as what they do with the “extra space”? That is a challenge.
Retail has not only been “over-stored” for the last couple of decades, but retailers continued to expand the size of their stores as well. My rule-of-thumb is that if it is not already in the assortment, what can you put in the new space that is better than what you currently have? Merchants, ever optimistic, paint a rosey scenario. The real answer to this is “almost nothing.”
So what I have seen is retailers adding more and more space and categories that underperform the base assortment in the new space. This is further exacerbated by the fact that very few retailers have solid policies and processes for managing inventory. As a result, we have seen a large amount of excess inventory that is now being culled from retail stores out of necessity. Refilling these shelves when the consumer resumes her buying patterns is not the right solution, because retailing is not going to be the same as it was for a long, long time. Keeping inventory under control is going to be even more imperative to deliver bottom-line results going forward. The right solution is shrinking stores, and that is going to be very difficult to do for most retailers. Few have the luxury of expanding a growing business as Walmart can do with grocery. Creative solutions for this dilemma are going to be one of the key differentiators that will help separate the winners from the losers in the coming retail wars.
As some have hinted in the comments, this may not be a result of the economic downturn. Retailers of all types have struggled with inventory management. It has been an emotional challenge, balancing the mantra of “Pile it high and watch it fly” along with keeping product reductions and waste low. The economic crisis has only intensified the need to manage COGS, however taking emotion out of the process and utilizing some great analytical tools available today can overcome this issue. Safety stock calculators have been around for a while, but the newest techniques can prove to be a true asset in this current marketplace.
Let me be politically incorrect for a moment. The SKU rationalization process reminds me of a shallow-minded bouncer at a nice club. The bouncer rushes to judgment to throw out niche items that do not perform in volume the same way as the major brands do, however, the bouncer does not realize that he’s throwing out a destination item that causes the highest spending patrons to come to the store and spend up to 50% more then the average patron while she’s in the store. And when the bouncer slashes inventory levels to out-of-stock levels, the patrons leave their shopping baskets in the middle of the aisle and head to the next store where she spends the rest of her money. SKU rationalization needs to better understand it’s patrons, and the REAL effects on bouncing any particular item, and also for slashing inventories.
I’m with Paula on this one. But, what’s a retailer to do? The markets are so short term minded they will kill any retailer that fails to read the tea leaves correctly on b-t-s and the coming holiday season. On the other hand, it’s depressing from the shopper point of view to visit a store that has blank space or little depth of product. Many of the associates that I encounter in most stores are zombie-ish as well. And why shouldn’t they be?
The “crisis du jour” mentality of the government and 24/7 media make it hard to be optimistic about anything without sounding like a Pollyanna kook! The retail winners this coming season, both b-t-s and holiday will offer compelling product and an energetic experience. Check out your local Apple store to see what that looks like.
A full shelf sells more than an empty one. This mantra is one of the golden rules of retail merchandising. The other side of the same coin that a full shelf minimizes is the issues with out-of-stocks. Out-of-stocks occur less frequently with a full shelf than with a partially full one, simply because there is more to sell, even though you are selling more! This dichotomy is correct, golden and makes retail work the way it should. Violating these basic merchandising laws will only result in slower sales of fewer products…More is better!
Wal-Mart’s expansion of staple and or depression-proof departments was at the very least a solid effort producing a lot of same store growth and increased profits. This endeavor produced increased market share and will reap even greater rewards in distant future growth markets. It is sad to watch other Big Box retailers flounder with what to do about slowing demands and decreasing inventory levels in large sales floor facilities.
When a management team sees all new market needs as a burden, it is time for leadership change. A new management team with lots of successful real war-time marketing experience. These men and women welcome new market opportunities to discover and grow the new company. Vendors and real estate companies are not to be looked at for increasing profit/life expectancy and any time and money spent renegotiating “what is,” is an unrecoverable waste. In addition, there is no software that will tell you what and how much you need for an all new market condition. There is no amount of advertising that will turn a need to buy market into a want to buy market. And there is no way of displaying what great deals are in the store today to absentee customers. The new consumer base is the only object of opportunity to be addressed and is learned and addressed the fastest by true sales/marketing experts. Like those we might find in a large, winning business like a Wal-Mart.
Woe is me, what’s a retailer to do? Huge empty shelves, peg displays that look like an empty parking lot. What ever happened to multi-sized shelves? Today every shelf seems to be 24 to 30″ deep, peg hooks, 18 to 24″ long. What ever happened to 6″, 8″ & 12″ shelving and hooks? Remember when you could look from the front to the back of the store and actually see the back wall? The rule was no counter over 5 or 6 foot high. Today, 8 foot seems to be standard; I think I’ve even seen some 10 footers.
These are easy ways to control your inventory, make your store full, control your SKUs, and reduce your shrinkage. More is not always better!
There are many issues. First, we were overstored. There is no consumer need for all the stores so some may not survive. Second, why is it a surprise that some departments sell less well than others? It is important to track and monitor sales of categories and items. There may be inventory adjustments now that should have taken place. Third, the ease of ordering online makes it less critical for consumers to have to visit the physical location. Can some of the extra space be used to create an inviting retail experience that will draw consumers to the store?
This is an easy question to answer. Yes, if inventory was either higher or lower than necessary to support the sales level it must be adjusted to meet the demand. If sales to the clientele of any retail store is less either by transaction amount or frequency of transaction then inventory must decline accordingly.
It’s just a hard economic reality that the cost structure of many retail stores means a break even that may not be met in the present economy.
The smart merchants will figure out a merchandise mix and level to keep their customers satisfied and buying, or if they can’t do that they’ll be forced to close up shop.