Customer Growth Strategy · Digital · Omni-channel · Retail · Strategy

Wall Street’s simple, surefire–and mostly wrong–strategy to fix retail

Show me a struggling retailer and I’ll tell you what many Wall Street analysts will say is that company’s quickest path to new-found prosperity. Close stores. Or better yet, close a whole bunch of stores.

This was supremely evident with the frenzy that erupted on Twitter prior to JC Penney’s Analyst Day last week. Here’s a paraphrased exchange I had with one “famous”–mostly for posting photos of crappy Sears stores–Wall St. type.  Note: this is highly edited and paraphrased for brevity (and perhaps levity).

HIM: Penney’s is about to announce a bunch of store closings.

ME: I doubt it.

HIM: But they must close stores, lots and lots of stores!

ME: No they don’t. (I proceed to tell him why).

HIM: You don’t understand. They must close stores, lots and lots of stores! They need to have the same number of stores as Macy’s!

ME: That’s dumb.

HIM: You’re dumb.

The Analyst Day presentation concludes. Penney’s announces no store closings.

ME: I don’t want to say ‘I told you so’ but…

HIM: Hey, want to see my photos of really crappy Sears stores?

Now don’t get me wrong. Overall, the retail industry is over-stored. And the growth of e-commerce is causing a fundamental re-think of the number of stores a retailer requires, the size (and configuration) of these stores and how these stores need to operate. A contraction and re-working of gross retail space is inevitable.

But the knee-jerk reaction in favor of wholesale store closings is focused on the wrong problem. Struggling chains like Radio Shack and Sears aren’t in dire trouble because they have too much retail space. They are struggling because their overall value proposition isn’t working. If Radio Shack and Sears had a business model that was fundamentally sound, their needed store count overtime wouldn’t necessarily be dramatically different from what they have today. Show me a nationally branded, omni-channel retailer that is closing a lot of stores and I’ll show you one that is likely on the way to extinction.

What many on Wall Street often don’t get is that the cost of real estate for many of these established retailers is really quite low, making it easy for even chronically low productivity stores to be cash positive. And while Wall Street likes to cite the growth in e-commerce as the reason why store counts need to shrink dramatically, the reality is that for any decently integrated retailer, stores help drive the online business–and vice versa. Total customer and cross-channel economics need to be taken into account when doing a store closing analysis. When you do this analysis, along with the cash flow calculations, it turns out that closing a lot of store often makes things worse.

As for JC Penney, they are certainly far from out of the woods. They have a ton of work to do to refine and execute a merchandising and customer experience strategy that can regain share in an intensely competitive sector of the market. They are rightly focused on honing a new brand positioning and strengthening their omni-channel capabilities. My educated guess–having done this sort of analysis for other department store retailers–is that with conservative sales growth assumptions, only around 5% of Penney’s stores would be sensible candidates for near-term closure. Penney’s management is likely watching this list closely as they see how new strategies take root and they better understand the omni-channel effect.

For me, if Penney’s were to announce a large number of stores closings in the next year–say 75 or more–it wouldn’t be evidence that they are smart managers, it would be a sign that their overall strategy isn’t working.

 

 

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