We’re About to Begin Our Initial Descent
Last week a Wall Street Journal article suggested that perhaps store closings weren’t exactly great for most retail brands. No argument from me, as I’ve been pointing this out for several years and devoted an entire chapter in my new book to this topic. Below is a section titled “We’re About to Being Our Initial Descent” from Chapter 8 (“Optimizing to Extinction”) of Remarkable Retail: How to Win & Keep Customers in the Age of Digital Disruption.
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Mass store closings are extremely unlikely to be the solution for a retailer that finds itself losing altitude. No retailer of any real size that I can think of has successfully cost-cut or store-closed its way to prosperity. The solutions to the vast majority of struggling retailers’ issues are rooted in a mix of rightsizing their physical portfolio, driving out wasteful spending, and most importantly, investing to become more customer relevant. We can tell this is working when a brand is winning the customers that are the best fit with the brand’s model, keeping its most profitable customers, growing average spend and shopping frequency with its core customers, and expanding its overall margin.
There are three unintended consequences to strategies that often spring from retrenchment and disinvestment. The first is that failure to invest in stores, whether that be in routine maintenance, in updating fixtures and visual presentation, in adding the latest technology, or in sales and support personnel, becomes a self-fulfilling prophecy. Sears, under Eddie Lampert’s leadership, is obviously the worst example of this, but many other retailers have followed suit.
The second is that, in many cases, stores play an important role in marketing by creating and reinforcing top-of-mind awareness, even for customers who rarely set foot in the store. Brick-and-mortar locations tend to play a disproportionate role in cost-effective customer acquisition. Pulling stores out of a market is often akin to withdrawing significant advertising dollars. Overall brand impact is reduced, particularly compared to direct competitors that have greater location density in a given city.
The third is the overall loss of scale and scope, which materially raises an organization’s cost of doing business and puts it at an even greater competitive disadvantage. When it becomes clear that a retail brand is losing volume, vendors and other suppliers become more reluctant to invest in the relationship. All sorts of economies of scale may be squandered, everything from procurement to transportation to home delivery to marketing and regional store management costs. As expense ratios deteriorate through decreasing volume, this only increases the pressure to find more expense cuts and close more “unproductive” stores. The list of retailers that have followed this path and are now out of business, in bankruptcy, or on life support is long indeed.
Of course it’s often pretty easy to rally behind optimizing the cost side of the ledger. It’s far harder to get the revenue side right-to go from good enough to remarkable, from me-too to intensely customer relevant, from also-ran to industry leader.
The key is to make sure we are working on the right problem. Even better, we need to start working on the right things before they become problems. When in doubt, prioritize growing revenues over cutting costs.
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