Is Now a Good Time for Retailers to Build?
The economy is slumping and retailers, at least some, are still opening new store locations. Does that make sense and what will the push to open new units mean for retailers once the current downturn is history?
Nordstrom is among those opening new locations even as consumers curtail spending. The company plans to open eight locations this year including a new unit opening in Clinton Township, Mich. this Friday.
“These are very long-term commitments. Is this the exact right timing to open? That’s not how we look at our real estate decisions,” Erik Nordstrom, president of stores at Nordstrom, told the Detroit Free Press.
Nordstrom is opening new stores even though it expects sales to be flat to down two percent this year. Sales at the company’s department stores open at least a year were off 11.4 percent in March.
“We remain very confident in our strategy. We are experiencing a downward cycle. These cycles happen periodically,” Mike Koppel, chief financial officer at Nordstrom, said last month at a Bank of America conference.
“Our core customer is growing faster than the market. We’re well-positioned to gain market share with that customer,” Mr. Koppel said.
Discussion Questions: Is now a good time for retailers to be looking to build new stores? Do economic slumps, particularly those that have hit the real estate market, represent an opportunity for retailers? Does the process for site selection change during economic slumps?
Opening stores is part of a long term strategy so the process may speed up or slow down depending upon short term economic conditions but the strategy shouldn’t change. What is important is to make sure that the strategy is in alignment with consumers of the future and that these stores provide the shopping experience that will draw consumers.
The US population recently surpassed 300 million. It will grow to 376 million by 2030, on its way to 400 million soon afterward. This will fuel a huge demand for residential, office, industrial and commercial properties. Nearly half the buildings Americans will live, work and shop in by 2030 haven’t been built yet.
Yes, I would say it’s a good time to invest in real estate.
In down times the weak get weaker and the strong seize their opportunities. For major retailers, the only true way to significantly grow market share and the top line is by adding stores. Down times are the greatest opportunity for segment leaders to expand share and consolidate their leadership positions.
More retail space??? Doesn’t America ALREADY have too much space? That’s certainly a common perception.
But back to the original question, as (almost) always, it depends on what type of store you’re planning to add: a ground-up large-scale space such as Nordstrom is a long-term project, and of necessity will be–or should be–largely independent of the business cycle; a smaller, move-in-in-a-weekend operation is likely to be closely tied to it. But the bigger picture also takes a backseat to the smaller: hi-growth markets grow in the worst of times, atrophying ones shrink in the best of them.
One aspect to consider is the ever-present need to grow financially. Wall Street does not reward retailers with minimal growth prospects. Stock price appreciation is driven by growth. Comp store growth is, in general, not going to drive most retail organizations over the next several years. If the retail concept is lucky enough to NOT have met geographic saturation, it makes extraordinary sense to keep expanding the number of locations.
Even if there are diminishing returns on new locations, there still is a distinct ROI…one that is going to drive stock price appreciation and shareholder value. Nordstrom does not appear to have reached geographic saturation. Certain markets, in the current climate, may not be able to absorb additional locations, and perhaps many new locations may not deliver at or above the current per store volume average. If, however, they contribute…it’s all good.
The basic reason behind the ability of Nordstrom to continue to expand is that their business model is strong, and represents a compelling advantage. This allows them to enter into new markets and steal share. I would not argue in favor of expansion for a retailer without such an advantage, even if geographic saturation hasn’t been reached. The volume to support new locations comes from someone already in business in that market…the overall retail spend is NOT growing measurably. If you don’t have a compelling advantage, now is NOT the time to expand. Nordstrom does, and it’s doing the right thing.
For well run profitable retailers, now is an excellent time to expand. It puts more pressure on the weaker competitors and hopefully will push them over the edge. Then, when the economy rebounds, there is less competition to deal with.
The obvious answer is; it’s always a good time to open if you’ve got the right idea (think Apple stores or, despite the re-think, Starbucks).
Les Wexner’s famous for pushing merchants to have the right items (fashion), the reason for that is simple; regardless of economic conditions, a hot product is a hot product (think iPod).
If your concept is flagging or weak, you’d be awfully foolish to open stores, which is clearly what’s happening across the board.
Retail has a storied history of recession-fueled successes. It could be argued that Target benefited from the recession of the early 90s when Dayton Hudson picked off the Gold Circle and Richway chains from Federated (corporate raider Robert Campeau shed them when he took hold of Federated Department Stores in an LBO), expanding Target’s reach. The early 90s were also a time of unprecedented growth for Wal-Mart.
And recession rallies aren’t just for discounters; P&G’s ground-breaking Crest Whitestrips and Swiffer lines which hit prices close to $50.00, launched during the 2001 recession and created a market for commodity-busting, high-margin innovation in the process.
I always think of recessions as a binge/purge proposition. The trick is figuring out what gloomy consumers want to binge on…and making sure that you don’t purge your way to peril.
There is no question that real estate opportunities abound during uncertainty and downturn. And of course, new store decisions are strategic and therefore should not be impacted by cyclical economic swings. However, in the real world, retailers are run by Boards and CEOs. They often have shorter term priorities: ensuring sufficient cash flow for operations and protecting their jobs.
New store activities are big users of resources: time and cash. Thus, many retailers are forced to focus more of these resources on surviving the downturn–they generally do not have the luxury of unlimited resources to enable them to make long term investments in these cases. Those retailers that have the resources and the foresight, therefore, have a significant competitive advantage in times like these.
When the slumps start, most companies and organizations seem to pull back because it is the expected thing to do–tighten the belt and weather the storm. I have seen this for years in Fortune 500s but every once in a while you see someone decide to “step out” and increase spending–what a great time to distance yourself from the competition! I agree with Nordstrom’s stance–this is a strategic move and more companies need to think about the long term. This does not mean just go open more stores–it means this is a good time to think for the long term and execute against your strategy. Unfortunately very few companies have this kind of foresight!
As Erik Nordstrom pointed out, a smart retailer committed to national or regional expansion needs to plan years in advance. Their new store in Michigan was doubtless planned long before the severity of the current slowdown became clear. You may see retailers bent on expansion (Kohl’s, Best Buy, Costco, Penney for example) slowing down their year-to-year numbers of openings but they need to be focused on five years from now, not five months from now, in their capital spending.
It’s also a great opportunity for growth-minded retailers to acquire real estate at bargain prices from other stores who are struggling in today’s climate. (Kohl’s is a prime example of a retailer who expanded dramatically (especially in the Northeast) by picking up sites from Caldor, Bradlee and others.) For the opportunistic and well-financed, this is a good time to go after market share.
Real estate and rents are cheap now so it make sense to sign lengthy agreements now, as opposed to when vacancies are low.
There is a retail adage that says if a store can open and survive during an economic downturn, it will thrive during the recovery. It’s probably true for most industries but is particularly valid for retail and hospitality.
Another point is that there are or will be some prime locations available as a result of other retailers filing Chapter 11 or scaling back. These locations are likely to be better than the ones available during an extended period of prosperity, so a smart company can, again, position itself well for the upturn by grabbing these locations now.
A final point is people. As workers are laid off by other companies, retailers can often attract better and more motivated people at the new stores and with any luck these new hires will stay in retail after the recovery.
I think a recent article in Harvard Business Review did a great job of summing up 4 steps to take to Grow During a Recession.
1. Invest heavily in research and development.
2. Go after the customers of your weakest competitors.
3. Make sure you identify and retain great relationships with your critical suppliers and monitor their financial position.
4. Think carefully about your talent needs.
Great steps for the smart retailer.
Retail has, in general, become an over-leveraged business, increasingly owned by private equity and other financial interests. This model requires an ever-increasing store base fed by strong economic growth. As long as the sales increase, private equity can flip their holdings every 3 years or so at increased multiples. Other financial owners can leverage the value of their holdings into additional growth or to purchase additional assets.
It all falls apart, however, during a persistent downtrend such as the one we’re experiencing now. The lesson we learn from Nordstrom’s continued expansion strategy is that when a retailer can stay focused on driving financial success through excellent service to their core consumer vs. artificial leveraging, cash flow will always exist to take advantage of real estate expansion opportunities during economic downturns.
Expanding during an economic downturn–especially in Detroit–seems foolish until you consider the opportunity Macy’s created for Nordstrom and other retailers by killing Marshall Field’s in the Midwest. Field’s had annual sales of roughly $2.5 billion, a good portion of which are now in play. Capturing just a tenth of that equals $250 million.
So it’s not the size of the overall pie that matters so much as your ability to grab a larger slice. When your competition makes a foolish step, now is always the time to act, not later.
As long as a new location’s return on investment (net of cannibalization losses to nearby locations) is good, it doesn’t matter what’s happening with the general economy. If the ROI is inferior, investors won’t appreciate the sales growth. Investors want profitable sales growth.
New store planning is a process that can take years–even a decade–and planned stores that have been in the works for some time should by all means continue. This is really independent of the economic outlook , good or bad, at any particular moment. If due diligence and market research was positive for a location, then those locations should be ok, or will be ok when things improve. It may, however, be a great time to review current operating stores and close marginal or poor stores.
Undertaking new development in a time such as we are now experiencing would depend on a lot of factors and variables. What kind of business is it and what is the market segment of the business? What is the opportunity in terms of location–is it a potential that may not be present at a later time disregarding economic performance, is it a potential replacement location that will be a better performer, and better company fit, down the road? Generally I would be cautious going forward for now, however, there will be opportunities that are right even in this climate.