Store Closings Galore
By George Anderson
As a CNNMoney.com report points out, we’re only a few weeks into the new year and already a spate of store closings have been announced.
OfficeMax said it would close 110 locations. Toys R Us plans to shutter 75 locations. The announced sale of Albertsons will certainly lead to some stores being closed or, at the very least, being occupied by others.
Even those opening new stores, such as Home Depot, plan on putting fewer “Grand Opening” signs out in 2006.
Geoff Wissman, vice president of retail with Retail Forward, said it comes down to commercial Darwinism.
“We’re increasingly seeing the strong getting stronger and the weaker players getting left behind,” he said.
Another reason for the number of stores closing, according to Howard Davidowitz, is that there are simply too many of them.
The chairman of the consulting firm Davidowitz & Associates said, “There’s nineteen-and-a-half square foot of retail space for every shopper in this country. That’s a lot. Is it natural for companies to keep expanding when the market is already overcrowded with stores, especially when there are numerous projections calling for a slowdown in consumer spending?”
Another reason behind the need for fewer stores, said Mr. Davidowitz, is the internet. With double digit year-over-year increases (25 percent this past holiday), stores are able to achieve sales increases without opening new stores.
Jay McIntosh, director of retail and consumer products with Ernst & Young, also thinks online sales are having an impact.
“Is online retailing stealing market share away from brick-and-mortar stores? Absolutely,” he said. “Online retailing as a group is the second largest retailer after Wal-Mart in terms of annual sales.”
Another factor in store closings, or at least in depressing the number of new ones being opened, is the high cost of energy.
According to Mr. McIntosh, “With energy costs escalating, it costs a lot more to run your business, especially if you operate a large fleet of stores.”
Retail Forward’s Wissman said other factors in store closings are the number of private equity firms buying businesses and activist shareholders forcing companies to look at the return they are getting from real estate holdings.
“These new institutional owners are looking more closely at the company’s balance sheet because they want to make their investments profitable,” he said. “So that’s one driver for shedding a company’s dead weight.”
Moderator’s Comment: What is your take on the state of retailing from a store opening/closing standpoint? –
George Anderson – Moderator
We’ve been talking about the glut in retailing for decades and there’s no doubt that online sales have exacerbated the situation. You simply don’t need as many stores.
This applies more to department stores and discounters than supermarkets. However, if, for example, half of the Albertsons stores went away tomorrow I doubt if anyone would miss them.
What I don’t see in this discussion of store closings and companies getting leaner and meaner is remodeling and upgrading of existing units. Cost cutting only goes so far. You make money in this business by selling merchandise — and you sell more of it in venues that have greater customer appeal.
I agree with Mr. Livingston in that too many retailers are asleep at the wheel, because the most important part of this equation relates back to what Mr. Percy stated regarding the SuperValu/Albertsons deal: “The secret is to put the integration of people before the integration of property… It’s the people who will make this work and it’s people who will destroy it.” No one seems to be paying attention to this fact. Maybe more attention needs focus on, let’s see, what’s the word I’m searching for here…HUMAN RESOURCES.
It’s interesting to put “the retail segment is saturated” comments from today with the “retail serves customers weakly” comments that occur in many discussions. It seems there are too many retail stores and yet most of them serve the retail segment below what customers may consider minimums of service/product mix, etc. So are we left with the problem that, again, an entire industry is quite depressed and doesn’t know it?
What an opportunity.
Does anyone remember the name of the creature that eats itself? Seems to me that that is what big retailers are doing. For years, all they did was expand and open more and more stores in close proximity to one another. No wonder not all of them could survive. Why on earth did anyone think they could? I’ve just come back from Southern California where the 30 or so miles stretching north from San Diego is pretty much one continuous strip mall after another. It seemed that any store you wanted to go to, you had a choice of half a dozen branches within a 5 minute drive in each direction you cared to take (I only exaggerate slightly). Some of the people I spoke to had strong preferences and could tell me, in minute detail, the reasons why. But did I ever ever see a crowded store? No way. Maybe that was the idea – to eliminate crowds and let people shop in wide open, empty spaces. Possibly not the most profitable way of running a business, however. Having said all that, though, I didn’t see any closed stores either so perhaps head offices do think that making small profits from lots of outlets is better than making bigger profits from fewer outlets.
What is your take on the state of retailing from a store opening/closing standpoint?
Let’s take a look at some of the chains that are planning to open stores this year –
Dollar General will open more than 600 stores
Family Dollar will open more than 500 stores
Kohl’s will open more than 100 stores
Trader Joe’s will open more than 40 stores
And, of course, Wal-Mart will open more than 500 stores this year.
I’m not sure what the net-net is in terms of total locations or total square footage, but I’d bet the openings are still ahead in both categories.
The “overstoring of America” has been a fact of life since the opening of malls hit their peak in the 1980’s. Now the driving force behind store closures, other than poor location or poor management, is online shopping. Online shopping will hit critical mass within the next 18 to 24 months and it will be at that point that we will really see mass exodus of traditional retailers. The only brick and mortars to survive will be niche players in the convenience, elite, or service-intense categories and, of course, Wal-Mart and good Wal-Mart knock-offs, although the percent of their online business will also take a bigger bite out of their own brick and mortar sales. The days of massive retail roll-outs are over.
Staring us in the face for years! Over saturation; no competitive differentiation; poor shopper service and experience; and no marketing to the profitable segment of ones business! Then, comes the online sales growth! Hmmmmmmmmm
There is no question that retail attrition has always been about the “survival of the fittest.” The recent announcements of larger store formats closing their doors reflect this principle. But there is more to it than that.
In the 80’s and 90’s, bigger formats were all the rage as the behemoth retailers prided themselves on having huge inventories and broad varieties as their point of distinction. This formula flourished, for the most part, due to the consumer’s recognition and perception that larger formats were likely to have what they wanted at a competitive price.
But recently, this niche has begun to erode. As others have mentioned, Wal-Mart’s continued proliferation and domination of the discount end of the marketplace, necessitates other retailers to seek higher ground, and perhaps smaller footprints. On-line shopping also has had an impact on brick and mortar sales, although I would guess not nearly as much as Wal-Mart has.
But in my view, there was never much attention paid to how all of this retail square footage was performing or contributing to the overall sales performance of the store. While many of us that study the in-store shopping dynamics understand the “80-20 Rule” is alive and well in all larger formats (that is to say that most of the sales and store traffic occur in only 20% of the store space), most retailers have done precious little about it.
In fact, larger stores have a real challenge on their hands to accommodate a changing consumer. Today’s shopper is savvier and more time conscious than ever before. Even in larger format stores, they learn very quickly how to circumnavigate the store and avoid aisles and departments that have little relevance to their shopping needs. If retailers begin to view their sales floor as “valuable real estate” which demands sales performance and customer relevance to justify its existence, stores can actually begin to optimally produce the sales warranted to keep big stores from becoming huge sources of “red ink.”
The key for retailers who operate larger store footprints:
1. Understand how interior departments and aisles are performing in terms of attracting shoppers and driving sales. Establishing dollars/space thresholds for each area is a good start.
2. React to this information in terms of designing stores that are more conducive to inviting shoppers into these areas as opposed to avoiding them and downsizing underperforming departments, categories and even sku counts if needed.
3. Down size the store footprint if possible to offer a more consumer-efficient shopping experience. Bigger is not always better. Shoppers will reward the retailer with incremental sales if they feel the store does not represent a huge investment of their time and they can find what they want.
4. Continue to monitor the performance of interior departments and categories and be prepared to make adjustments as consumer trends and competitive environments change.
I agree that it is pretty much commercial Darwinism. We have too many retailers that are asleep at the wheel. The good news is we have a lot of strong progressive retailers that are changing the retail landscape. So it’s really a good thing that the weak, poorly run retailers are exiting to make way for the stronger, better run competitors.
Mr. Davidowicz hit the nail on the head. This country is over-stored. This is not a good omen for Sears, who can only make their excellent adventure successful in the long run by selling off real estate. If the supply of vacant sites continues to increase, the value of the real estate has to go down. Too few buyers chasing too much available real estate.
Good reasons were cited in the article. The only thing I’d build with is this: in years past, some retailers were more willing to sacrifice short-term profits for long-term market share. This credo had quite a following, with major business magazines crowing about how market share was the most important thing, and that if you had that, everything else would eventually fall into place. Things fell all right, but not “into place.” Davidowitz had it right — we’re overstored. And with online becoming stronger and more profitable, it’s a no-brainer to take a sharp pencil and do your sums on brick and mortar operations.
Closing the stores is not enough. The locations need to be repurposed into recreation centers, warehouses, housing, offices, schools, medical facilities, or parkland. Otherwise, the excess capacity is not destroyed, it just gets recycled into other retail uses that drag down the profits of our industry. Every chain retailer with more than 50 stores would benefit by getting rid of the least profitable 15%. But who gets rid of the least profitable 15% of the shopping malls, strip centers, and street locations? The mediocre locations often ruin whichever retailer goes to them. America suffers from a shortage of reasonably priced housing, decent schools, medical facilities, and parkland. The retail real estate industry would help itself, the retailers, and American society by removing at least 15% of all retail square footage permanently.