An inconvenient truth
Why are there really so many store closures.
By Graham Wallace, Senior Business Strategist, Esri UK
Over the past few weeks we have heard a number of announcements from retailers that they intend to close stores, or sublet excess space. These include Sainsbury’s intention to re-allocate and sublet some 1.5m sq ft of floorspace, Morrison’s announcement in March that it is to close 33 unprofitable stores and Tesco’s decision, announced in January, to close 43 stores.
It’s very easy to attribute these current woes to the rise of Aldi and Lidl or to cite the rise of convenience retailing, but it’s an inconvenient truth that a significant proportion of the stores that the established supermarkets are planning to close are convenience stores.
Convenience retail is not the same as destination retailing. The analysis required to identify suitable sites to roll out convenience store formats is exacting and the sensitivities are finely balanced.
This run of store closures is not unique. In 2009, Starbucks closed over 600 outlets in the USA because performance wasn’t in line with expectations. The subsequent investment on analysis software might have helped Starbucks to select suitable sites – helping to avoid the need to write-off $800m – well over $1m per store.
But the issue is not confined to convenience stores.
Since 2010 over 20 retail chains have either gone into receivership or been sold on to new financial backers, wiping out significant shareholder value in the process. This point was starkly reinforced by Tesco’s announcement of a £6.38bn pre-tax loss for the year 2014/15 – and this despite plans mooted in July 2013 outlining the intention to sublet space to Sports Direct.
The issues which created this maelstrom are unlikely to abate in the short term: sluggish demand, cost pressures and new low cost formats.
The reality is that retailers which matched the desire to expand with the acquisition of additional space or over-footed store formats may have failed to understand the new realities of the retail market. Property investment needs to be underpinned by analysis of customer demand, a clear understanding of each retail centre’s space utilisation and the sensitivities inherent in the business model of each retail format.
Demand planning, customer analysis and return on property investment increasingly need to become core retail competencies which, effectively used, create a source of competitive advantage.
Indeed, the extent to which shareholder value has been destroyed in the retail sector over the last six to seven years, by gaps in this analytical capability, may well precipitate a realisation from investors that things need to change. Today, directors of financial service organisations have to be able to explain the basis on which they assume risk and ensure capital adequacy to support their loan book. In the coming months, it wouldn’t be a surprise if similar measures linked to investment in property were called for by investors in retail businesses.
The analytical tools already exist to enable organisations to avoid becoming headline news for all the wrong reasons. Looking forward towards an omnichannel-centric retail market, the need for sound market and customer analysis, to underpin the world of both bricks and clicks, is likely to become ever more critical.
