Just as consumers learned to buy everything from eyeshadow to sneakers online over the past year, retailers also picked up some new skills. Shipping from store, enabling curbside pickup, and ultimately distributing inventory across several channels were all things retailers had to adapt to quickly. This was an expensive proposition. We’ve previously written about the hidden costs of running an omnichannel operation. As retailers shifted the bulk of their capital investment to improving distribution channels, it came at the cost of brick-and-mortar operations. Approximately 10,000 stores are expected to close this year.
But even though online commerce and overall omnichannel growth is expected to continue for the foreseeable future, closing stores should not always be the obvious – or even right – choice. Omnichannel customers are often the most valuable, so closing the wrong stores can cause a tremendous loss of synergy.
Retailers have traditionally cut the bottom-performing stores based on each location’s four-wall contribution. But using this methodology often overlooks other critical metrics. According to an AlixPartners survey, 84% of retail executives do not account for all costs and benefits in store profit and loss statements to understand the true economic value of a store.
The following are some hidden benefits that make stores an integral part of a true omnichannel business:
Personalization and other customer data: Stores are the primary driver of private label credit cards and loyalty signups. When a store location closes, retailers can miss out on valuable data gathered from these customer touchpoints.
Customer acquisition and retention: Stores can almost be considered larger-than-life billboards or marketing proxies and act as a very effective acquisition vehicle. In addition, customers who shop across several channels are usually the most loyal and spend about 1.8 times more than store-only customers. There is also an opportunity to turn an in-person return of an online purchase into another store sale. Up to 40% of online return transactions in the store result in a follow-up purchase, according to AlixPartners analysis.
Competitive market dynamics: In retail, sometimes out of sight means out of mind. When a store location closes, existing traffic from it does not always transfer online. Closing a store can turn consumers onto any competitors that are in the area.
To understand the true economic value of a store, retailers must account for all direct and indirect costs and benefits. This is different from the traditional four-wall profit analysis most retailers do when deciding to close a store. What could an Omni Economic Value model of store profitability look like?
Retailers that don’t evaluate these benefits in their store profit calculator can unnecessarily close stores, resulting in significant revenue drops. One retailers that was transitioning to a digital-first model decided to close half of its stores, resulting in almost 90% customer attrition. As retailers evaluate the future of their channel shifts, it is paramount to get their omnichannel network right.
While establishing the right store network—and determining how to best use all available real estate—will differ for each retailer, a physical presence plays a big role in how consumers interact with a brand. Sophisticated retailers will move away from the traditional profit-and-loss equation of a store to a more thorough understanding of its role in the overall business. While there is no denying that sometimes closing a location is the right move forward, this should be a deliberate and well-considered choice and not a hasty one.
