Expert Insight: Know When to Fold ‘Em
How to determine the right time to close a store; Walgreens closings set example
CHICAGO -- Walgreens' news this spring that it will close 76 stores this fiscal year gave me pause.
After 34 years in retailing, I’ve realize there are generally two reasons a retailer would close stores:
- Because the stores are unprofitable, underperforming and a drag on the entire system.
- Because the retailer is in serious financial difficulty and is desperate to find ways to raise cash. In other words, a survival attempt. (Perhaps Radio Shack is an example of this.)
In the case of Walgreens, it is most likely the first reason. I give these as general reasons as there will always be other shades of gray. However, good retailers understand that the reasons their stores exist are to provide a service to the community, contribute to the viability of the company at large and add value for the shareholders. So Walgreens is doing the right thing.
The Least-Common Denominator
Quite often, a customer’s perception of a retailer is based on the least-common denominator. Stores in dying strip malls, difficult traffic patterns, poor night lighting or shop-worn interiors are examples of this. Thus a decision needs to be made to either upgrade these locations or scuttle them.
What can make this decision challenging is that some of these poorer stores could still be marginally profitable. But in the end, they detract from a retailer’s intended image, and the capital in that physical plant might be used better in another location, thus generating more profit.
As an example of what Walgreens has done with some of its new sites, consider the store they recently opened in Chicago’s trendy Wicker Park neighborhood. The drug-store chain restored an architecturally significant bank building and, besides its usual fare, added an excellent foodservice offering, one that fits that neighborhood. This type of focus, along with closing underperforming stores, drives the vision for future growth.
Another example seems to be shaping up with Wendy’s. The quick-service-restaurant chain is completing some excellent store remodels to upgrade its image. It behooves the chain to move as quickly as it can as the older, subpar restaurants still contribute to the overall image.
Conversely, other companies—I won’t name names—continue to mire in their own soup, so to speak, and keep underperforming stores open. At one point, these may have been viable stores, but time has passed them by.
Sometimes poor stores come along with the acquisition of another chain. In those instances, every store in the acquired chain must be evaluated as to whether or not they fit the future image and plans of the acquiring group. Those that don’t and/or cannot be brought up to grade should be divested as they confuse the retailer’s image in the eyes of the customer.
Certainly, I recognize that retailers within the same channel can have different core marketing/operations values. For instance, one company may have a large value-oriented fuel presentation; another may have no fuel at all. The point for each of these retailers is to convey those values through to the customer.
A customer should expect that Brand X convenience store would be basically the same across locations. I visited a store once that had some of the traditional c-store items in half the store. In the other half of that store, the retailer merchandised only sea shells! Confusing.
These types of stores present a real drag to the company as a whole. They require single-store marketing, which is a resource-eater on many levels from marketing to accounting to operations, etc. The sea-shell store may be a decent business for that specific geographic area, but didn’t fit into the company’s overall image.
A good operator would not spend capital on these types of stores, and thus they sink further into "outdatedness." They eat up the company's resources so that management must spend a great deal of time on them, and they can eat away a company's bottom line because they don't contribute to profitability.
On a group store spreadsheet, they may not appear to be an issue, but the profits from other stores mask the true problem. Thus Walgreens is doing the right thing when it divests underperforming stores.
Similarly, 7-Eleven is spinning off some underperforming locations and sites that cannot fit their new model. Most likely, many of those stores were from some acquisition and/or may even have been good stores at one time. But those stores do not fit the current 7-Eleven vision. Good for them! That's how it should be.