Why aren’t retailers closing more stores?

Discussion
Photo: RetailWire
Jun 20, 2016
Tom Ryan

Faced with weaker brick and mortar traffic as well as a surge in online spending, many retailers this year have moved to shutter locations. But, according to the Wall Street Journal, a few factors are preventing retailers from closing the amount of stores that may be required to realign brick and mortar supply with demand.

Green Street Advisors earlier this year asserted that hundreds of department stores have to close for malls to restore levels of productivity reached more than a decade ago.

Terry Lundgren, Macy’s CEO, also hinted last week after a disappointing first quarter that more Macy’s doors may close as he sees many shopper journeys starting on their smartphones.

“I don’t know what the number (of stores) is. But I know there needs to be fewer of them,” Mr. Lundgren said. “We’re offering as many shoppers as we possibly can the ability to have a full omni-channel experience of using our online capabilities plus our store experience.”

A primary reason more stores aren’t closing, according to the Journal, is the cost of pulling out of lengthy leases.

Dick’s Sporting Goods cited lease risks as the reason it wasn’t aggressively looking to take over many leases of the liquidating Sports Authority.

“You can make a bad buy from a merchandising standpoint and you can mark it down and do whatever you need to do with it to get it out of the system,” said Ed Stack, chairman and CEO, on his company’s first quarter conference call. “For bad real estate, you’ve got it for 10 years.”

The Journal article also pointed to a research note from Citigroup’s Paul Lejuez pointing out that retail executives aren’t motivated to close doors since their compensation is tied to adjusted operating income and top-line growth.

Finally, retailers are slow to close stores because of an innate “glass half-full” view of the business and a reluctance to cede market share.

Wrote Miriam Gottfried of the Wall Street Journal’s “Heard on the Street” column, “Investors should hope retailers start to recognize the windows that can open by closing doors.”

DISCUSSION QUESTIONS: What do you see as the main reasons retailers are delaying the inevitable closing of stores? Do you agree the slow pace of store closings hurting retail’s underlying fundamentals in the next few years?

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Braintrust
"What's hurting the business now in general is the challenge of figuring out how to make the store more interesting again."
"What happens when retailers close stores? Shoppers go elsewhere. They don’t remain loyal and shift ALL their purchases to a website."
"Yes, retailers are trying to “figure it out,” but the problem is what are they trying to figure out?"

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24 Comments on "Why aren’t retailers closing more stores?"


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Frank Riso
BrainTrust

Long-term leases at very good rates as well as using the stores for other reasons, such as a local returns so that impulse buying can occur. Some may feel that online buying may not be as growth-orientated as it seems right now. Being able to try on clothes is a big factor as well as instant need for ownership. Lastly, giving up the store to a competitor is considered a last resort. I do not see it hurting the retailer as long as good decisions are made for keeping the store open and profitable, even if only a little.

Herb Sorensen
BrainTrust

BTW, note that back in the day — the 1920s, the first billion dollar retailer in the world got there with ONLY very short term leases, allowing them to adjust their execution to match the demands of the market, from year to year. That business survived and thrived until the death of the two founding Hartford brothers, in the 1950s. This launched a long term death spiral — just now in liquidation. See: “The Great A&P and the Struggle for Small Business in America” by Marc Levinson.

Paula Rosenblum
BrainTrust

I think these statements are way too broad. Of course there are too many stores for certain chains. Did anyone really think that Macy’s could sustain that number of stores in any economy? Did anyone really believe that Gap had such a huge addressable market?

Stores still serve a purpose on the path to purchase, and retailers know it. I do know of some that are taking out five-year leases rather than 10-year, to hedge their bets … but I think it is just too early to make sweeping statements like this. Shopping can be a social experience, separate from where the sale gets consummated.

So I don’t think retailers are delaying “the inevitable.” I think they’re trying to figure it out. Retail’s underlying fundamentals are selling the right product at the right price to the right audience. And no market is infinite. What’s hurting the business now in general is the challenge of figuring out how to make the store more interesting again.

Bob Amster
BrainTrust

While many of us agree that we were overstored a few years ago already, and are even more so now with the impact of e-commerce on brick-and-mortar sales, it is difficult for retailers to close locations where significant portions of the lease agreements remain in force because of the cost of terminating such leases. In many cases, it is worth it for retailers to keep open locations that are just marginal until such time as the cost of ending those existing leases is small enough to make financial sense.

Furthermore, I suspect that it is difficult to negotiate breaking a lease with a landlord when the entire industry knows that retailers are in contraction mode.

Cathy Hotka
BrainTrust

I hit a mall yesterday and was surprised to see that many of the old mall stalwarts weren’t there and smaller upstart brands were. Retail is in the process of right-sizing, and it will be years before it all shakes out. The losers will be the companies who do nothing.

Gene Detroyer
BrainTrust

This will be topic in class today. I will report back. In the meantime, enjoy this short video. It explains the challenge the CEOs face.

Bob Phibbs
BrainTrust

Let’s not forget the malls themselves. How many of them want a white elephant anchor location and what that means for their own viability? My guess? Zip.

Steve Montgomery
BrainTrust

The basic rule for stores losing money is simple — if it costs more to close than operate you continue to operate.

Then, as other have pointed out, in most cases these locations have long-term leases and given the brick-and-mortar retail climate landlords know that getting a replacement tenant will not be easy and are therefore unwilling to negotiate an early termination. Then there are those who believe if they can only out-last X competitor that the store’s fortunes will turn around. The bottom line is that there are lots of reasons to continue to operate marginal locations.

Anne Howe
BrainTrust

I think retailers know that most shoppers still want to enjoy physical shopping. We’re hard-wired as humans to seek and enjoy the experience, from a social and provisioning standpoint. The problem in large part is making the experience relevant and desirable as a part of the omnichannel path to purchase.

Shoppers have an almost universal desire to be “helped” in the store, and retailers seem to back away from staffing with a relevant solution for understanding how to really help their shopper. Where is the dedication to putting the solutions shoppers crave in place?

What happens when retailers close stores? Shoppers go elsewhere. They don’t remain loyal and shift ALL their purchases to a website.

David Slavick
Guest
As online sales as a percent of total retail spend continues to increase, the logical thought is that the physical store is at risk. However, the physical store is the highly-visible representation of the brand. If the store isn’t present, you lose awareness. With a lower awareness you lose share of mind. Convenience for returns, personal service, touch/feel of the goods, experience of the brand persona through interaction with store associates — all tangible aspects lost if the store no longer exists in your trading area. Strong modeling capabilities exist from analytical providers that can help retailers decide on which stores should go/remain open — based on financial analysis plus target market/trading area factors including propensity to purchase online by the population in proximity to the store in question. How much share of market would the brand lose if the store closed? How much in sales could be retained by target customers who will no longer visit the physical store, but will continue to buy online? These are critical issues to consider — but shrinkage… Read more »
Gene Detroyer
BrainTrust

The class says the problems are:

  • Exit barriers (leases, et. al.);
  • The impact of the P&L;
  • The perception of a failed reputation;
  • “Closing stores looks likes failure.”

Those who don’t close their stores will follow:

  • Western Union who did not react to the telephone;
  • Kodak who did not react to digital photography;
  • Blockbuster who did not react to DVDs in the mail.

I will add: management hubris.

David Livingston
Guest
2 years 7 months ago

Relax and give them time. Retailers know when to pull the plug. No retailer wants to have a reputation for closing stores. Many do it slowly under the radar as leases expire. They do not want to create anxiety among employees and Wall Street. My experience has been for every store a retailer closes they have five more in the works. Just give them some time.

Brian Kelly
Guest
2 years 7 months ago

A couple of weeks ago, the Motley Fool published an article in which I tallied 435 stores closing this year. Last year, I counted over 3,000 doors shuttered. Seems to me stores are closing, chains are going out of business and malls are fading in the hinterlands. The herd is being culled.

On NPR today, the topic was Peak Trade. Meaning growth is gone. As before, I suggest reading Robert Gordon’s “Rise and Fall of US Growth.” Consumer spending is linked to growth. Read Charles Murray’s “Coming Apart.” The wage gap is real and growing. Pew says the middle class is going away. These are shoppers and they are no longer shopping as they did in the past.

Retail’s underlying fundamentals will be hurt due to shopper wage stagnation. So the retailer that creates a newer, fresher and more relevant experience via its selling model has a chance. Nothing is for sure.

As we say, “retail ain’t for sissies.”

Dave Wendland
BrainTrust

Interesting discussion. I would agree that leases are one contributor to a retailer’s reluctance to close stores. Another may be visibility (physical properties are noticeable).

On the other hand, I’m more convinced than ever that for those retailers who are in denial about the effects of e-commerce or have delayed reinventing their brick-and-mortar storefront and purpose, closing stores may become their only option. If retailers with good store locations but ever-reducing traffic asked for my opinion, I would begin by asking three questions: 1) what do customers really want from your physical property?; 2) how could the brick-and-mortar operation complement online and mobile activities?; and 3) in what ways can relevance return to the physical shopping experience (in ways that cannot be delivered technologically)?

Ed Rosenbaum
BrainTrust

So many of my fellow BrainTrust friends have said more than I can. There is very little to add. Yes, retailers are trying to “figure it out,” but the problem is what are they trying to figure out? Yes, long term onerous leases is a major factor. Yes, poor past decisions are a factor. There is a mall near my house with two Macy’s stores serving as part of the four anchors. The other two are Sear’s and Penney’s. The future for that mall and the other retailers might be dimming. There needs to be a strong draw; not teenagers roaming around not shopping. Could the problem be retailer’s have their heads in the sand hoping this will disappear? That is where I am putting my money until the stockholders get upset and start screaming for their dividends.

Herb Sorensen
BrainTrust
Retailers just can’t accept the need for “shopper efficiency.” Ever since retailers moved from having any real selling expertise to being merchant warehousemen, they have relied on shoppers to be unpaid stock pickers, with little notice — or care — about how efficiently shoppers could shop their stores. Hence, ballooning warehouse-type stores, with the real concern being about how to shove more unwanted merchandise in the shoppers face, hoping they will buy just “one more item.” (The Problem: “Parked” Capital“) Meanwhile, the super-performers have been stores like Costco, Stew Leonards — and now of course, AMAZON. Retailers just can’t get over the idea that all that bodacious merchandising (not SELLING,) space was created to service demand by suppliers at the back door for access to shoppers, and NOT demand at the front door, from the shoppers themselves. Kiss a lot of that square footage good-bye, unless you can improve the EFFICIENCY of the shoppers in it. Costco and other super-shopper-efficient bricks retailers will continue to grow and thrive, but not like Amazon, who with their… Read more »
Craig Sundstrom
Guest

Of course it’s not so simple. Just because your sales are down 10% doesn’t mean you close 10% of your stores, or whatever. Locations will still remain open if they are still profitable, with the result that we have many “zombie chains” filled with low-profit stores. And anyway, I’m not sure the premise is true: one sees many closures, albeit often thru liquidation … who’s to say what the “right” number is?

Kai Clarke
BrainTrust

Leases clearly make things difficult, as well as pay incentives for upper management … but another factor which has to be considered is the perception that a retailer “has to have” a physical presence in order to fill a local market’s needs. Location, location, location are no longer the 3 key words in retail success….

Marge Laney
BrainTrust
2 years 7 months ago

I agree with Paula 100%! It’s not that there’s too much brick and mortar retail, it’s that there’s too much of some retailers.

Brick and mortar needs to focus on making the customer glad that they made the trip and provide them with an experience that makes their buying decision easier and more enjoyable.

Peter Charness
BrainTrust

The retailer side of “over stored” has been well discussed. The next implication of course goes to the landlords, particularly of the “b” malls, or those unlucky enough to have a dying department store” as anchors. What’s the new use for an aged mall? Particularly when you think of the newer look outdoor malls, (Easton Court, Kierland) that seem to be doing so much better.

Kim Garretson
BrainTrust
2 years 7 months ago

Peter Charness asks a great question: “What’s the new use for an aged mall?” City and county governments in almost every state have been wrestling with this question for some time. I just spent the winter in Palm Springs, and the media has called that market one of the fastest growing in region, with an incredible amount of retail and mixed-use new construction downtown. Yet less than one-half mile away is a “dead” mall that has been battling the city for more than five years saying it wants to reopen as a mall. The city wants it to convert to a satellite college campus, which I think is both a great idea for that market, and likely for many other markets.

Kenneth Leung
BrainTrust

Lease obligations is one of the big reasons and it costs too much to exit. Unless the mall has another tenant in the wings they have no incentive to negotiate. For large anchor stores it is cheaper to operate at a loss than pay for the exit charge. Fact is even with omnichannel stores have a place and retailers are now trying to find ways to make shopping more compelling as an in person event by incorporate socializing and other services. I feel that anyone who is looking for quick replenishment will gravitate towards web, while those looking to mix social activities with shopping will be in the ones going to the mall/store.

Brittain Ladd
Guest

The challenge faced by retailers is that if they close stores, they lose visibility with consumers. Out of sight, out of mind. Without a robust e-commerce platform to drive sales, retailers who close stores are effectively reducing revenue. What I see taking place in retail is a Catch 22 — close stores to reduce costs but also lose sales revenue.

Brian Kelly
Guest
2 years 7 months ago
I want a do over. This question has stuck in my craw all night and I missed the answer. People I think the main reason stores live past their expiration date is people. Sure all the objective reasons for holding off on pulling the plug on an unprofitable location are covered. Consider each member of the leadership team and their vendor relationships/contracts: banks, vendors, suppliers. No one wants their network to hear of softness. Especially now with so many fading retailers. And the most gut wrenching decision in shutting a store is cutting loose the people that run it. No one wants to bring the bad news to a team that has done everything to make the store appealing, relevant, dynamic and profitable. Retail gathers a cross cut of humanity to operate a store. Single parents, veterans, teachers, young kids beginning their careers, liberal arts students. All members of the community the store serves. Some stores are cursed with bad management. Some stores are left behind when a community changes. In Chicago, Polish neighborhoods became… Read more »
wpDiscuz
Braintrust
"What's hurting the business now in general is the challenge of figuring out how to make the store more interesting again."
"What happens when retailers close stores? Shoppers go elsewhere. They don’t remain loyal and shift ALL their purchases to a website."
"Yes, retailers are trying to “figure it out,” but the problem is what are they trying to figure out?"

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