Are retailers cutting their way to profitability or slowly bleeding to death?

Discussion
Photo: Getty Images/WendellandCarolyn
Nov 17, 2020
George Anderson

If you’ve been around the retail industry for any amount of time, you’ve no doubt been a part of at least one conversation on how there are just too many stores for the market in the U.S.

Studies have pointed to the amount of square feet of retail space per capita in the U.S. compared to other developed countries around the world. No one comes close to America. Of course, large retail bankruptcies and subsequent store closings have been part of the domestic retailing scene for a long time. Last year, well before the novel coronavirus pandemic broke out, retailers closed a record number of stores, according to Coresight Research.

The expectations for this year, again before the outbreak of COVID-19, was that the industry would likely set another record. In that regard, at least, the results didn’t disappoint.

It’s not uncommon for retailers to shutter stores that are not performing up to expectations. What some question is the rationale that major chains that close dozens and even hundreds of stores use to explain the wisdom of their moves. The thinking typically goes something like this: Closing stores will reduce costs and an increased focus on digital sales will provide a more profitable way to serve markets where doors are closed. In reality, however, that isn’t what typically happens. Experience reminds us that you can’t cut your way to growth and profitability in the retail world.

A Wall Street Journal article yesterday addressed the topic and the continuing cycle of store closings by national chains.

“No retailer ever announces one round of store cuts — it’s always the precursor to a store bleed,” Simeon Siegel, a BMO senior analyst, told the Journal. “Most companies we looked at had lower revenue and profit than before they started closing stores.”

Mr. Siegel said that when stores are closed, retailers often have to increase marketing expenses to try and hold onto market share via their digital business. The result is typically not good from either a top or bottom line perspective.

DISCUSSION QUESTIONS: Do you think retailers that announce large numbers of store closings are often simply putting off their ultimate demise? How can retailers determine the proper number of stores the market will profitably support in balance with their digital operations?

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34 Comments on "Are retailers cutting their way to profitability or slowly bleeding to death?"


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David Naumann
BrainTrust

Large store closings are a sign that the retailer’s overall demand is dwindling. The pandemic has made struggling chains even more vulnerable. While some categories have prospered like grocery and discount department stores that are considered essential businesses, some categories have struggled like apparel and more specifically business apparel (e.g. Men’s Warehouse) as many corporate employees are still working from home and don’t have a need for business attire.

Mark Ryski
BrainTrust

Trimming store counts is a smart strategy for retailers to adjust to changing market dynamics, and so as a strategy it’s sound. The massive reduction of stores, as described in the article, is another animal all together. When we see a dramatic reduction of stores it’s often a precursor to larger financial failure or a complete reset of the business. At the point at which a retailer is shedding a significant number of stores, survival is usually the big driver – along with lease expirations. I doubt that there is a formula or a single approach to massive store reductions since each retailer’s unique circumstances will determine the path.

Bob Amster
BrainTrust

It is all about about achieving the balance of closing stores that do not perform to a certain level and reducing the infrastructure required to operate the remaining open stores profitably.

Dick Seesel
BrainTrust

In many cases, retailers can’t cut centralized costs fast enough to keep up with the lost sales from store closures. And when these stores pull out of markets entirely (think Sears), they become irrelevant in the minds of shoppers who might be considering omnichannel options. While it makes sense for stores with hundreds of locations to prune the least profitable sites, the pace of closures from some national chains looks like a harbinger of doom.

It’s no accident that stores like Walmart and Target — both with massive physical footprints — were already leading the pack on omnichannel sales. The pandemic has only solidified their market position, thanks in part to all those locations offering curbside pickup of online orders.

Perry Kramer
BrainTrust

Retailers proactively closing stores as part of a larger plan to manage inventory differently will win. Many of the retailers who are closing stores to purely control expenses are probably on a long road to a bad place unless they can operate differently. There will be a demand for stores and in-person shopping for a long time. The secret to long term success will be having the right mix of store/experience center/fulfillment center in a single location.

Shawn Harris
BrainTrust

There continues to be a secular decline in brick and mortar retail sales, as consumers shift to more online based fulfillment. This move from analog dollars to digital pennies is a structural change that will not be solved by simply closing stores, but instead by taking a deep assessment of unit economics, as pallets to stores is not eaches to homes. Also, diversification to find other sources of revenue will be key. It has taken Amazon close to 25 years to start to get this right.

Cathy Hotka
BrainTrust

Savvy retailers are in the process of doing everything they need to do to survive in this environment — opening stores, closing stores, switching formats, deploying technologies, and re-examining their competition. The retail companies I worry about are the ones that are acting like it is still 2019.

Gene Detroyer
BrainTrust

Sadly, there aren’t many savvy retailers today — maybe there never were.

Art Suriano
Guest
Retailers who close large numbers of stores are thinking of short term solutions, which rarely works. Why did the stores fail? The retailer will say not enough traffic and not enough sales. I have often had the conversation and proved to many clients that stores fail because of poor performance, leading to less traffic and lower sales. People who go to the store go because they either like to shop or want to see and try the item before making the purchase. But what happens when they go into a store with no associate available to help them, or worst yet, a rude associate who can’t be bothered? The customer leaves. They may come back one or two more times, but if the experience is the same, they’re done. That same customer will tell their family and friends, and when they find a competitor they like better not only will they shop there but most likely so will the same family members and friends they talked to about their horrible experience. So if a retailer… Read more »
Xavier Lederer
BrainTrust

Lack of performance is often a mere symptom of a deeper root cause – lack of strategic alignment at the leadership level, poor execution of the strategy, talent issues… Closing stores without identifying and addressing the root cause of the issue doesn’t solve much unfortunately.

Neil Saunders
BrainTrust

There is overcapacity in the U.S. market, but it is not quite as bad as some of the studies make out as the numbers for the U.K. and elsewhere are erroneously low and mall space is often mistakenly used as a proxy for total retail space. The real problem with the U.S. is that there is more bad retail space than in other countries and a lot of that is underperforming. Cuts in store numbers are needed, but so too is a focus on building or rebuilding the types of shops people want. And part of this means format flex so retailers have different types of stores for different types of locations. The one-size-fits-all cookie-cutter approach to stores is dead!

David Mascitto
Guest

There’s no question that North America is/was over-retailed and store closures were going to be an inevitability as omnichannel gained further ground and D2C also ate up marketshare. The pandemic has simply accelerated this. What retailers need to do now is optimize each channel, be it store or digital, to ensure they can extract every dollar of profit they can from every order. That could mean using a break-even or unprofitable store as a micro-fulfillment center to help lower delivery costs, or taking a hard look at their SLA with customers to ensure they are not “over-delivering” on speed and convenience when it’s not necessary and makes orders unprofitable. A holistic approach to supply chain efficiency and customer experience is needed and not knee-jerk reactions like across-the-board store closures and free same-day shipping.

Jeff Weidauer
BrainTrust

Closing stores doesn’t have to be a bellwether for imminent disaster – but in most cases by the time the retailer decides to make the cuts it’s too late to save the profitable locations. When store closures are made as a way to cut costs in a struggling company, marketing is typically cut as well. That’s when the real problems start.

Bob Phibbs
BrainTrust
Customers are tied to their homes and out of their normal routine. Acting like the past eight months is forever is to continue the hackneyed retail narrative – “if the store closes, they go online.” “We don’t need stores.” “All anyone wants to do is shop online.” If you took Amazon and a few other players out of the mix, you’d find most business does not transfer to online when stores close. In fact the opposite happens. The only way these struggling retailers will try to woo them to their websites is bound to be more discounts and promotions. If C-level execs just realized that the store is the hub everything else springs from, they’d take the experience within a store’s four walls seriously. You can’t close your way to knowing who your customer is or discount your way to margin. Hire people who don’t look down on working retail, give them training on how to engage a jaded shopper, discover their interests and bond so your experience stands out along with digital initiatives and… Read more »
Camille P. Schuster, PhD.
BrainTrust

With good back office technology retailers can know what their customers purchase, in what quantity, whether they do so online or in-store, and whether they pickup online orders at the store or have them delivered. With that information retailers can reconfigure their stores to include more back-of-store space for fast moving products or those products in demand locally. The rest of the store can be designed to enhance consumers’ in-store experience. This takes time, money and creativity and it all hinges on the back office data and analysis of that data. Closing stores is not the path for climbing out of a hole.

Gene Detroyer
BrainTrust

We have a gazillion years of experience here on RetailWire. Here is the question my BrainTrust colleagues — what retailers ultimately survived years after closing hundreds of stores?

Dick Seesel
BrainTrust

I’m thinking, I’m thinking…

Gene Detroyer
BrainTrust

When a retailer loses hundreds of stores, they will ultimately describe it as “closing non-performing stores.”

Did hundreds of stores become “non-performing” all at once? Or were some “non-performing” six months ago? Twelve months ago? Two years ago? Five years ago? If so, why weren’t they closed then?

Lee Peterson
BrainTrust
Absolutely. Sure all retailers were over-stored, but we also know that closing too many stores actually hurts online business. But what choice do they have? This “double-whammy” has spelled a slow death knell for retailers all century, from J.C. Penney to J.Crew to Gap to Macy’s to Toys “R” Us, and on and on. It has been called “circling the wagons” by many, including me. It’s just a matter of time. Just like cutting staff during hard times, you’re much better off going deep and moving quickly. Define the successful company you’ll be in the future and go there NOW. A slow bleed never works. The issue is most companies are driven by what Wall Street thinks rather than what they really need to/should do. Let’s face it, other than the huge behemoths like Walmart, Target, Amazon, Best Buy, Costco, Home Depot, etc., retail of the future is two things: smaller and better. Take the hit now, rip off the Band-Aid and welcome the new, 21st century you.
Ralph Jacobson
BrainTrust

This topic is a much different story in 2020, of course. Just looking at the permanent closings so far, including more than 40 percent of Black-owned businesses having closed this year (staggering!), it’s clear that no small business can stay in business with no opportunity for revenue (e.g., due to COVID-19 shut downs). However in “normal” years in the past, a network analysis of existing store performance versus anticipated growth opportunities has helped determine the best way forward. We are still over-stored in many metro areas, so expand cautiously these days.

Rich Kizer
BrainTrust

We should all hope that current retail closures, along with the potential of more COVID-19 mandated store closures (and also along with a potential minimum wage hike) will not not turn us into a “C/W/T” — Costco, Walmart and Target dominant retail world.

Dick Seesel
BrainTrust

Rich, I think it’s been a C/W/T world for a while and we’re just living in it. Department and specialty apparel stores have been struggling for years, not just during this Year of the Plague. That’s not to say that a better model can’t emerge — think Amazon for one.

Steve Dennis
BrainTrust

As I’ve been speaking about and writing about (in fact chapter 8 of my book “Optimizing to Extinction” focuses exclusively on this topic) for many years, show me a retailer that is closing a lot of stores and you’ve likely shown me a retailer that has a brand relevance and remarkability problem, not a too many stores problem.

It’s been clear for many years that some retailers need fewer, reimagined and differently located brick and mortar operations. But let’s be blunt. Closing stores does precisely zero for customers. And bailing doesn’t fix the hole.