Shrinking to prosperity: The store closing delusion

Yesterday Radio Shack announced it’s closing 1,100 stores, nearly 20% of their total. Earlier this year, JC Penney took the axe to 33 units, amidst a rising call of analysts pushing for more aggressive real estate pruning. Sears has closed some 300 units across the last 3 years, including recent decisions to shutter its downtown Chicago and Seattle “flagships.”

For those pushing a shrinking to prosperity agenda, the rationale is that eliminating the weakest units in the portfolio improves overall productivity. Well, yes, that’s just math. Unfortunately you don’t make money on ratios.

They also claim that with the growth in e-commerce fewer stores are needed. While there is an element of truth to this, it ignores the vital inter-relationship between physical stores and digital channels. For the vast majority of multi-channel retailers the web drives store traffic and stores drive e-commerce. Close stores and you hurt your e-commerce business because your brand become less accessible, and therefore less relevant.

Now don’t get me wrong. If a company is hemorrhaging cash and the data show that a given location cannot be made cash positive quickly (including the effect on the digital business, net of closing costs), it needs to go. Marginal economics 101. And certainly with shifting populations, rapidly evolving consumer behaviors and changes in real estate conditions, there is always going to be a steady stream of real estate rationalization.

Yet the heart of the matter for all the retailers at the center of the store closing debate is this: their value proposition is not working. Unless you shift your business model to becoming more destination driven–or somehow more regionally focused–closing a bunch of stores is likely to make things worse in the aggregate. You lose economies of scale and scope. You become less convenient to your target consumers. Your brand visibility declines.

Brick and mortar retail is not dying. But it certainly is becoming different. Yet it’s not hard to find many examples of winning brands that continue to open plenty of stores (e.g. Walgreen’s, Michael Kors). In fact, in the face of all this talk about mass store closings, formerly e-commerce only players like Warby Parker and Bonobo’s are now opening physical locations. I guess they must be really stupid.

I cannot recall a single retailer that engaged in large-scale store closings in the last decade that is thriving today. Actually every one I can think of is either gone or gasping for breath.

For Radio Shack and Sears, the hacking of their store count signals that they don’t have a viable strategy to survive and that their store closings are more rooted in desperation and the desire to keep the wolf from their door. For Penney’s, if they are able to craft (and execute) a value proposition that fights and wins in the middle market–no easy task–chances are they can support more stores, not fewer. If they announce plans to cut more than 10% of their units, it’s likely the beginning of their slide into oblivion, not a sensible bit of financial engineering.

 

 

 

9 thoughts on “Shrinking to prosperity: The store closing delusion

  1. Brilliant thoughts on the paradox middle-market retailers are finding themselves in. It seems as though the choice comes down to 1) stop doing what isn’t creating value or 2) simply do it in fewer places. Usually the latter is chosen. I know that is an over-simplification, but you can’t overstate how difficult it can be (and how hesitant we are) to change culture.

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  2. Brilliant thoughts on the paradox middle-market retailers are finding themselves in. It seems as though the choice comes down to 1) stop doing what isn’t creating value or 2) simply do it in fewer places. Usually the latter is chosen. I know that is an over-simplification, but you can’t overstate how difficult it can be (and how hesitant we are) to change culture.

    Like

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