Reprinted from www.gordonbrothers.com
Today’s retailers face unprecedented challenges in the marketplace as they confront the evolution of not only customer shopping patterns, but also how retail is defined. Historically, top tier retailers thrived because they had the best locations and offered desirable merchandise at a great value proposition. Add to that efficient merchandising controls and tight field operations, and it equaled success.
That model has shifted significantly due to the maturation of e-commerce and the effect it has had on brick-and-mortar efficiency in the omnichannel environment. A recent slew of store closures affecting specialty retail demonstrates the impact of this new reality for the retail industry.
Given this trend, retailers are reviewing lease portfolios with a careful eye on the future and their ever declining sales per square foot ratios. Successful management teams are proactively identifying locations that, while today may be marginally profitable or break even, will turn into negative contributors, given this irreversible trend. Historically, the decision to renew or extend leases was based primarily on store contribution and the key demographics of individual locations. Stores with marginal contribution were identified and decisions were made on whether to renegotiate under more favorable terms or close locations.
In the current environment, retailers are now factoring in the real e-commerce effect (in most cases, double-digit increases) and its impact on future store performance, and making real-time decisions on store profitability. As part of this growing trend, retailers are facing more store closings than ever and are accepting them as part of the changing retail landscape. Understanding that closing stores is not indicative of failure, but rather of an inevitable shift toward an omnichannel marketplace, is important to the success of any retailer. While it’s unlikely that brick-and-mortar stores will ever be displaced entirely by e-commerce, management teams must understand the balance between the two and develop a strategy going forward.
When reviewing lease portfolios in today’s environment, management teams must consider several key factors aside from store profitability: adjacencies to other store locations and e-commerce migration.
Given the sophistication of today’s customers and merchants’ ability to track their shopping patterns, either through loyalty programs or mobile devices, retailers can analyze individual markets to determine how much transference would likely occur should they close a location. With this information, retailers can project an appropriate number of stores in each market and identify potential closures. The ability to close a store and effectively transfer customers to an adjacent location and track buying behavior going forward is crucial to success.
While transferring customers from a closing store to an adjacent store is critical, a second and equally important step is transitioning shoppers to the e-commerce platform. In some cases, retailers may be exiting a market entirely for a variety of reasons, but the ability to retain a core percentage of the customer base online is a primary vehicle for growth in today’s marketplace. In virtually every instance, a retailer’s key initiatives are to increase its online presence and protect the brand.