February 16, 2017

Why Closing Stores "Works"

All of the best retail brands actively measure what happens when a store is closed. When you close a store in 2015, you create an artificial laboratory where you can see how customers respond in 2016. It's like forcing an A/B test on a market!

Many retailers observe dynamics directionally similar to this:
  • Close a $1,000,000 store, and the store generates $0.
  • However, $150,000 of sales from that store move to other retail stores in that market.
  • And, another $150,000 of sales migrate online.
  • In other words, 30% of the sales still happen when the store closes.
The 30% of sales that still happen ... $300,000 in our example above, happen without the fixed costs associated with the dying store. As a result, these sales are MUCH MORE PROFITABLE than the sales left behind by the dying store.

If you are a Chief Financial Officer and can overcome the cost of servicing the debt on the dying store, closing stores makes sense.

If you are a Chief Executive Officer tasked with growing a brand, closing stores makes no sense whatsoever but generating less and less profit makes even less sense!

As long as customers keep migrating online and as long as Traditional Retailers do not reinvest in stores to grow merchandise productivity, we're going to see a massive amount of store closures.

Worse, as one mall-based brand closes a store, foot traffic for other mall-based brands declines, creating a self-fulfilling prophesy - a feedback loop of sales declines that require more store closures.

The smartest retailers are going to close a ton of B/C locations, and they will then reinvest considerable money improving the customer experience in A locations. Not-so-smart retailers will simply close B/C locations and hope the sales move online. Those retailers will be disappointed, because the sales never move online at sufficient rates.

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