I spent a couple of years as the CFO of a small, specialty retailer. It wasn’t fun for anybody. That’s why I found The Wall Street Journal’s chart on store closures so far in 2016 so fascinating.
There are generally two types of business decisions that can be made. First, companies that are struggling need to make the hard decisions necessary to stay in business. These often include layoff’s, and store closures for retail businesses. These decisions aren’t enjoyable for anyone. Second, companies can choose how to invest, grow, and split the proceeds of a profitable business. These decisions are great! The fact is, if you spend too long in the second category, you will end up needing to make some difficult decisions. The longer you wait, the harder they will be. Most of the old retailers are finding out this lesson.
When I arrived at the small retailer full time, I was shocked to realize how badly an emphasis on sales rather than profitability led us in the wrong direction. Not only were we heading in the wrong direction, but we were heading directly off a cliff. Over the course of two years we went from over 85 mall based stores to under 40. Firing people is never fun (yes, I did a fair amount of it myself), but I thought about a few lessons after looking at WSJ’s chart.
- Balance Sheet’s Matter – For the company I was at more stores meant more sales. Higher inventory levels almost always resulted in more sales. So we made investment after investment in store leases, people to staff the additional stores, support personnel, inventory to stock the new stores, and increased inventory levels once they were open. Sales were going up, but the increased capital requirements were slowly suffocating the company. Many individual stores lost money, and many more failed to cover the cost of the additional capital necessary to run them. We looked fantastic if you looked only at sales. We were dying underneath the hood.
- Retail Competition is Brutal – One day several years ago, I walked through the mall where we had a store that was struggling. I counted six other stores in the mall that sold identical products to what we sold. Same brands, same products. That was before taking into account any online competition, or taking into account stores that sold similar products. Look at the list from the WSJ again. Office Depot and Staples are essentially the same. Wal-Mart and Kmart are largely interchangeable. What did Sport’s Authority offer that you couldn’t get at Dick’s, Wal-Mart, Target, or a number of other places? The point here is that retail companies have no room to be able to raise prices and expand margins. In fact, margins are decreasing in the face of long term fixed costs and short term variable cost increases (labor).
- Too Much Retail Space – If you multiply the stores in the table by the average store size you get approximately 61.5 Million square feet of store closures announced this year in the United States. What’s going to happen to all of that retail space? Some will get absorbed, and some will get redeveloped. However, how many movie theaters and restaurants do we really need?
From my perspective, the biggest problem with retail is that I just don’t have any interest in almost everything that is being sold. Occasionally, I will get excited to do a little shopping and head to the mall. I end up exhausted after visiting a couple of stores, and end up buying the absolute minimum.
Unfortunately, many other retailers are going through what I experienced (my experience was on a MUCH smaller scale). It’s not fun for anybody.