Retail and consumer products expert, Michael Appel, offers insights on industry trends, issues and opportunities.
If you looked only at the spate of recent store closing announcements, you could be forgiven for thinking the sky is falling. But from my work on front lines consulting with retail companies, I believe the real reason bricks and mortar retail is in upheaval is that the U.S. is vastly over-stored. Take a look:
Country Selling square footage per capita
United States 46.5
United Kingdom 23.0
The current closings are really a delayed reaction to a rationalization that should have occurred decades ago. Why the delay? The insistence on top line growth by Wall Street and the M&A community.
Public retail companies cannot continue to feed the EPS beast without continuing to open stores, as organic growth from existing units won’t give them the double digit growth Wall Street looks for.
They end up boosting profits in the short term, but in the longer term, negative operating leverage sets in as they open in B and C locations and discover they don’t have the infrastructure they need.
This cycle of rapid growth and rationalization has been happening for decades, before the advent of eCommerce and the millennial effect.
Now, with the costs of operating a multi-channel business increasing faster than the overall growth in retail sales, the economics no longer work.
Add in rapid e-commerce growth and incessant pressure from Amazon, and retailers are finally facing up to the fact that most of them have been operating too many units for too long.
What’s a retailer to do?
Smart retailers need to think long-term and determine the optimal number of stores they need for their brand and customer base. This requires a frank reassessment of their real estate portfolio while the company is still profitable. Then they need to invest in closing four-wall unprofitable stores as well as invest in revitalizing/re-conceptualizing their remaining profitable fleet.
Ralph Lauren’s recent announcement of their intention to rationalize their store fleet is a good example of a strategic, progressive approach to changing conditions in the marketplace. Investing in digital commerce without continuing to evolve the look and experience of their stores is a recipe for liquidation.
Williams Sonoma is a good example of a company that acted early and strategically. They had a strong catalog business that grew with e-commerce and knew they wouldn’t need as many stores in the marketplace, so they started closing stores as leases expired.
It’s easy to blame Amazon and e-commerce for store closings, but in many cases it is management’s inability to think long term, re-strategize where growth should be by channel, and how each channel would best serve its core customer. Retailers should ask themselves: “Where will my company be in five years?”
It can be difficult to reach these decisions when you’re immersed in day-to-day operating decisions.
I’ve worked with many companies recently where it was obvious to me that stores needed to close, but management/owners were too close to be able to see the broader strategic perspective on how to best drive the business going forward.
An outside perspective can offer the needed vision while providing both short-term solutions and long-term strategies. It’s crucial to bring in someone who understands retail and can see the big picture.
In the end, less overall square footage for a retailer should result in higher sales and profitability as the store fleet more closely mirrors a brand’s core customer. It can also help retailers refocus on supplying great product and a great store experience that consumers can’t find digitally.
For more insights, email Michael at email@example.com or call him at 914-806-3632.