When it’s time to close stores: a framework for decision making

Deb Purcell, Pitney Bowes Business Insight

In today’s environment, faced with declining comp store sales and profits, retailers are challenged to make quick decisions regarding closing units to protect or restore profitability. On the surface, the decision process seems easy: close the units generating the lowest margins.  However, the decision regarding which units to close should be made from a strategic and longer term perspective with an eye toward the optimal market coverage and how the picture will change when the economy begins to recover. This thought process is comparable to how employers might approach work force reduction when needing to cut costs.  Ideally, companies in this situation would consider the talent needed for the long term rather than simply cutting the highest salaries across the board to lower costs today.  Similarly, retailers should consider which assets will be most valuable when healthier conditions return.

Before making a decision to permanently close a unit, retailers should investigate projected growth in individual markers over the coming years, and design the optimal deployment for effective market coverage considering customer distribution and competition.  The following considerations will help retailers to ensure that they are making comprehensive store rationalization decisions.

1.  Is the unit operating up to its potential?  Any decision to close a store should be made after considering all options: hold, fix, or close.  To understand the best course for a specific unit, the following matrix provides a helpful decision making framework:                   

As the matrix above suggests, it is important to understand whether the underperforming unit is performing up to its potential, and if not, whether the performance could be fixed. Forecasting sales of the unit or observing how the unit performs relative to others with similar trade area characteristics can help a retailer spot an “outlier” unit that should be “fixed” rather than closed. The scatter plot below reveals such a possible opportunity:

2.  What are the expected macroeconomic trends for the specific market, and how will those impact the prospects for the individual unit?  Today, it is hard to find a market where retail sales have not been adversely impacted by the economy.  Many deals that were struck in the early part of the decade resulted in profitable locations through 2007; but those same terms are generating losses today.  But what will market conditions look like in 2010?  Will profitability be restored?  While most markets are hurting now, recovery will come at different times and to differing degrees to the individual markets where retailers operate.  In the more promising markets, the best strategy may be to weather the storm.

3.  How would a unit or market departure impact a retailer’s competitive positioning and overall market coverage?  When designing and implementing an optimal deployment strategy, two overriding goals drive maximum financial results. First, serve the most customers, focusing on serving your best customers best.  Secondly, prevent competitors from out positioning your unit relative to the in-profile population base.  With these goals in mind, the decision to close a specific unit takes on a new dimension.  Will closing that unit allow your competitor to grow and gain economies of scale at your expense, thereby weakening your overall position in the minds (and actions) of your customers?  Will closing units result in voids in your market coverage leaving untapped potential that could be filled by a profitable relocation at reduced lease rates or a two-for-one opportunity?

In other words, the question about whether to close a retail location should not decided based on short term conditions or performance, and it should not be made in isolation from the balance of the concept’s retail network or market potential.