How do I optimise my retail network? Which store(s) to close?

I was initially reluctant to write this article. I didn’t want to come across as being negative or a defeatist. However, the reality that we are presently faced with requires new thinking and solutions.  

You can make a million excuses for why something didn’t go well, but ultimately, just fix it and get on with it. Be a solutions person.”

Emily Weiss, Founder, Glossier

If your customer base changes overnight then you need to respond rather than just react. Store closure is one lever you can pull to respond and reposition your business.

Retailers are potentially facing a triple blow. Firstly, we are currently in a lockdown situation so retailers cannot trade unless they are an essential service. Secondly, travel, especially international travel, is going to be restricted once we come out of lockdown. This will reduce potential customers. Thirdly, consumer confidence has taken a blow and we are all likely to sit on our hands and reduce our spending when we come out of the lockdown.

Many retailers are reassessing their retail landscapes. Some retailers have already announced store closures to reposition their businesses for the anticipated retail landscape going forward and to reduce overheads.

So, faced with a new retail landscape and the need to reduce costs, which of your stores would you choose to close?

I believe there are 2 broad approaches to this question.

There is the cost approach which focuses on closing stores which are either:

  1. the most expensive in terms of property costs (the highest cost approach); or
  2. the least expensive to close in terms of exit costs (the lowest exit cost approach).

The Cost Approach

The cost approach focuses on cutting costs out of your business and is easy to implement because the stores with the highest property costs or with leases expiring shortly are easy to identify – you simply need to review your lease register.

While I acknowledge the speed and ease advantages of this approach I would characterize this approach as the tail wagging the dog because property costs are driving business strategy. 

The Profit Approach

The alternative and in my view the preferred approach is the profit approach which focuses on closing stores which generate the least profit contribution in your retail network. This approach focuses on maximising profit (and cashflow) within your business.

The profit approach may be harder to implement than the cost approach depending on your data capture and analysis. 

Assuming limited data and a need for urgency the profit approach would rank stores on their profit contribution margin using the below formula.

Store Sales  -  Store Specific Costs  =  Store Profit Contribution Margin

With more data and time you could drill down into your store sales looking at local demographics, product range penetration, store features etc to refine your analysis. The key concern to address is to ensure Store Sales reflects the Commercial Area it trades in. You do not want to rely on Store Sales data if the results are being dragged down by an operator or other factors that affect store performance. 

If you also operate an online store you may want to allocate your online sales to your physical stores assuming you have postcode data for your online sales.  This would assist in assessing whether there would be an online impact to a physical store closure. Do your customers buy online because your physical store network gives them confidence to buy online, do they use a local store they go to to collect or return an item?

Once you have ranked your stores by Profit Contribution Margin (PCM), you can then target the lowest PCM stores for closure.

You could even apply a hybrid approach and target the lowest PCM stores which are the least expensive to close.

Don’t Forget About Fixed Overheads

Regardless of which approach you adopt, as you close stores the profits available to pay for your fixed overhead reduces.  

If you do not reduce fixed overhead then you will reach a break even point where the remaining stores’ profit equals your fixed overhead and your business profit is zero. 

If you are going to respond to the new retail landscape and reposition your business by closing stores then my recommendation would be to keep your eyes fixed firmly on your profit margin contribution and your overall business profit.