Bold Move #4: Close one in four stores

November 04, 2016

How to increase profit while closing underperforming stores

Ardenberg, BAS Group (e.g., Dixons), DA, Houtbrox, La Ligna, La Place, Macintosh Retail Group (e.g., Scapino), McGregor, Miss Etam, Mitra, MS Mode, Paradigit and Unlimited Sports Group (Perry Sport, Aktiesport). What do these retail chains have in common?

Yes, indeed, all of them have gone bankrupt in the past two years, but all of them have also restarted operations with a smaller footprint of more profitable stores, usually within months after going bankrupt. In fact, more than two-thirds of the retail chains that have gone bankrupt in the Netherlands since 2015 have turned around their operations and re-entered the market with a smaller store footprint.

The economics behind this phenomenon are clear. Retail chains that have a large number of stores typically see different profitability levels across the store network, driven by size and demographics of the catchment area, location in the high street, in-store execution, and store-specific cost structures (e.g., variations in rent per square meter). Over time, revenue is moving online, either shifting to the chain’s own, usually less profitable, online channel or leaking away to pure-play competitors. The stores’ cost structures have remained relatively constant, resulting in an increase in the number of unprofitable stores. In fact, we estimate that between 20 and 40 percent of stores in a regional or national retail company in the Netherlands currently are losing money after accounting for corporate overhead.

Emergency cost cutting measures

Retailers react by trying to increase the store productivity, often by introducing noncore, impulse assortment. As shown in our previous blog, this often is unsuccessful and, more important, unsustainable. On the cost side, retailers try to pass on their troubles to suppliers by negotiating prices and purchasing conditions. Next up are emergency cost-cutting measures — for instance, reducing the number of employees in the store or taking on cheaper but often less experienced employees. These measures provide short-term relief but could reduce service levels and lead to a downward spiral as the picky and fickle shopper of today demands a great shopping experience with service levels to match.

Companies such as B&Q and Homebase have taken a different route, closing as many as a quarter of their stores since 2014, which has resulted in a profit increase in the difficult do-it-yourself market. Closer to home, “de Bijenkorf” shuttered five of its 12 stores and invested €200 million (US$218 million) in its e-commerce platforms and the premium style of its remaining stores. This led to an increase in profit from €8 million to €11 million in 2015, driven by a 6 percent increase in revenue.

Yet few other retailers have taken this logical (but bold) step: closing underperforming stores. There are very good reasons for this. First, closing stores reduces the total volume of goods flowing through the chain, which leads to decreasing purchasing power and lower diffusion of fixed costs (mainly retailer overhead). Retailers that close stores also could lose market share to the competition. In addition, the closure of stores can be very capital intensive: writing down obsolete inventory, writing off store fixtures and other investments, buying off lease contracts, and funding the severance packages that accompany the reduction of the sales and head office workforce. Finally, managers fear the blemish the brand will endure when going through a major footprint reduction.

Lesser of two evils

But when the alternative is bankruptcy — a painful, time-consuming, and even more brand-destroying process (assuming a restart) — these deterrents seem the lesser of two evils. In fact, by proactively rationalizing the store network and supporting corporate structures, retailers have an opportunity to create a leaner, sustainable cost base. By letting go of the deadweight, management can focus on building a stronger store network and letting it grow to its full potential instead of being held back by the troublesome few.

This will create a reinforcing loop, as consumers will gain a consistent view of the store chain as they only experience the best the retailer has to offer in busy and lively stores, instead of also in unattractive, underinvested echo chambers. This in turn enables and inspires employees to develop the format to the next level rather than wasting creativity on zombie stores. The online channel, which is seen as the instigator of all of this, will tamp down the amount of lost sales, as a portion of the shoppers will move to the online store instead of to an offline competitor.

“Elk nadeel heeft zijn voordeel!”

Key challenges need to be overcome, but for many retailers, it isn’t a matter of choice: Shrinking is the only way up!

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Marc Hoogenberg

Partner, Strategy& Netherlands

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