Store closures have become the main plot device in the story of retail’s supposedly impending doom. The numbers do not look pretty: more than 12,000 low- or nonperforming store locations are estimated to close by the end of 2019, compared to 5,844 last year. The closures are a symptom of larger issues – the US has too much store space per capita, and some retailers are failing to understand and deliver on their customers’ needs and expectations. But it would be foolhardy to think that physical retail is in its last act. What needs to be retired is the notion that the success of a store location hinges entirely on how much merchandise it can move based solely on in-store sales.
For legacy retailers, stores still account for approximately 80% of total sales1. They also provide a halo of benefits to ecommerce sales while also serving as a branding and customer connection and service tool. So much so that even digital-first companies that have successfully built their businesses online are now opening hundreds of stores and making physical retail a part of their overall growth strategy.
It’s no secret that stores are expensive to run: their payroll alone can often make up 30% of a retailer’s total selling, general, and administrative expenses2. Stores also often act as return locations for online sales, which, while providing a valuable service to consumers, is commonly reflected as negative sales against the store’s P&L. At the same time, the traditional makeup of store operating performance metrics – composed of the four-wall payroll, rent, maintenance, and utilities – remains under continuous macroeconomic pressure.
This puts an unfair burden on in-store sales. Instead, retailers should consider evolving their approach to how the success of a store is measured and revisit store profit and loss (P&L) calculation. Among new metrics that can be included into the store P&L calculation are:
- Customer lifetime value progression: When new or old customers sign up for the brand’s loyalty program, their lifetime value increases. Retailers often incentivize store locations to get more customers to sign up, which should be more explicitly reflected on the P&L. Additionally, stores that provide supplemental services such as personal styling can lead to new customer acquisition through that route.
- Gross margin improvement: For retailers with omnichannel operations, better coordination among channels results in getting unproductive inventory moving, which improves inventory turns. It allows merchandise that would have languished to the point of clearance in the store to sell at lower markdown levels online.
- Reduction in direct shipping: The ability for a retailer to ship from store within local markets can both improve speed of fulfillment and reduce costs compared to centralized fulfillment centers in major hubs such as Ohio, Kentucky, and California.
Retailers should consider implementing an omnichannel view of stores and define store roles not just based on direct product sales, but also the other types of benefits they provide. Our approach to this view classifies stores into five categories:
- Sales generator: These would be stores that are profitable based solely on merchandise sales and their ability to move product. These are often the best-performing store types.
- Brand builder: These types of stores, requiring little inventory, serve to create brand awareness and offer the retailer an opportunity to gain a foothold in previously untouched markets.
- Flagship: This store type would be the best experience for the brand possible, fulfilling several purposes, including being a large merchandise sales center as well as creating a branding halo and offering shipping, returns, and other customer services.
- Access point: These stores would offer consumers buy-online-pickup-in-store options and other services. This could be a store location in a rural area where it acts as the retailer’s solitary physical presence for hundreds of miles, or something like the Nordstrom Local concept, which provides services such as alterations, personal stylists, and the option to both ship to and return online purchases.
- Speakeasy: This type would drive limited sales but also serve as a critical tool in reducing fulfillment costs through its geographic location and the ability to store and ship products. Its layout would feature an extensive backroom with shipping capabilities achieved through a smaller sales floor. In the 2018 holiday season, Target saw a 29% growth in digital sales that was steered entirely by store-fulfilled purchases.
While many retailers currently don’t measure any data related to the store other than merchandise sales, this new classification will mean that they need to revise key performance indicator expectations for individual locations and reallocate capital and operating expenditures based on new store roles. Changing how performance is viewed can result in situations where stores that may have been previously unprofitable could start breaking even or even yielding net positive numbers. Ultimately, it can help prevent costly store closures and layoffs and avoid negative publicity while creating the opportunity for additional growth.