October 22, 2014

Omnichannel = Store Closures

Did you read this little ditty (click here folks)? The article is about Pier 1 and their "omnichannel guideposts".

Read the second paragraph within Guidepost #2. Heck, I'll quote it for you:
  • "... with approximately 60% of its leases coming up within the next three to four years, the retailer can carefully evaluate real estate needs and adjust the size of its store portfolio accordingly. Each store and market will be reviewed to determine the appropriate number of stores to maximize market share and optimize profitability."
The quote may as well read something like this:
  • "Thank God 60% of our leases are coming up, because we're going to close a ton of stores in poor locations and ask the website to carry an ever-increasing level of responsibility. We only want to keep the very best stores, and we want to unload the junk before the rest of the industry wakes up and realizes they have to do the same thing."
Omnichannel is headed toward a very interesting and unanticipated outcome.

Great retail locations are always going to be great retail locations. Lousy retail locations, however, are experiencing a different dynamic. The great location has an "entertainment draw" that keeps traffic flowing. It's fun to be at a great location! The lousy locations, however, do not have the same buzz. And if the individual store does not have buzz, and does not sell product that requires a store visit to complete the purchase, well, then e-commerce can (in theory) do a better job. When e-commerce can do a better job, then the store no longer serves a purpose.

Therefore, the bottom 30% of the retail portfolio is "at risk" in an omnichannel world. The best locations warrant the investment in infrastructure. The bottom 30% of the retail portfolio experiences slow leaks in demand from stores to e-commerce, and eventually, the bottom 30% of the portfolio is at or below break-even. Why would you invest in the omnichannel infrastructure in stores that are at or below break-even? There will be CFOs that look at the numbers, and say, "we're closing these stores, it's up to the website to pull more weight."

One problem.

If you close a store in a single-store market, you lose 80% of the volume. If you close a store in a multi-store market, you lose 60% to 70% of the volume, your mileage will vary. 

The logical outcome of the omnichannel revolution is this: E-commerce will gain share in cases where there is no entertainment value in the retail experience. This will ultimately lead to a rationalization of the bottom 30% of the retail portfolio, and once those stores are closed, sales will be lost (just like when Borders closed, that demand did not flow to Barnes & Noble - some of that demand floated to Amazon, most of that demand disappeared).

A lot of stores are going to close. You're going to have omnichannel to thank for it.