Our investors are pushing us to close stores, but we feel we need them to build our multichannel offer. How do we demonstrate the stores’ worth?
This question is more complicated than it might first appear, says AlixPartners director Dan Murphy, partly because in-depth analysis is required to prove whether a store is really profitable.
He explains how AlixPartners works with retailers to determine profitability: “We start by figuring out which bits of the business make money, and which lose money.
“We work down through each layer of revenue and cost to identify which categories or stores are cash positive or negative. The results can come as a surprise to the retailer because while a store might appear profitable at the top line, it can be loss making once all the relevant costs are accounted for – what we call a ‘four wall’ analysis.”
Murphy says that a few years ago, investors might have been relaxed about short-term losses funding longer-term strategic growth, but this is no longer the case. “Investors’ time horizons can be compressed as they might be looking for an exit in two years, so a strategy of building a multichannel model at the expense of supporting loss-making stores in the short term will not make much sense to them.
“Even where investors are in for the longer haul, their attitude is going to be more risk averse than it was a few years ago, and so any loss-making strategy is going to be much harder to sell to them.”
He concludes: “Ultimately, if you are reliant on your investors or lenders for funding and they are trying to persuade you that something is a really bad idea, it’s probably sensible to take another long hard look at it.”