Are we better to close stores that are trading OK as the leases are up for renewal, or close poorly trading stores with years left on the lease?
“It might help to ask this question another way,” says Dan Murphy, director at AlixPartners. “If the question was ‘should we close our profitable stores and keep the loss-making ones open?’ then the answer is surely obvious.”
It’s a detailed numbers game, says Murphy: “At AlixPartners we work with many different retailers and questions such as this are common. We always begin with a full cost and revenue model, to see which bits of the business make money and which bits lose money – whether this is stores, categories, countries, or channels.”
“When it comes to building a full store profit and loss model, we have to account for all the effects – both direct and indirect. In the case of closures, these will include staff redundancy costs, lease terminations, stock clearance, and physical closures. Indirect effects include the reduced efficiency of the delivery network – unit costs will increase as store numbers decrease. Reduced buying quantities for fewer stores may have a negative effect on supplier price negotiations – all of these must be considered in order to build the full cost model.”
Once everything has been included in the financial model, you can decide whether the investment horizon is short term or long term. In some cases, it may be necessary to exit loss-making stores immediately (for example if a lender is pressuring for immediate cost reductions) and in others a longer time horizon may be more appropriate.
“Either way, if you want to make the decision with your head rather than your heart, a thorough analysis of all the cost and revenue effects is essential,” Murphy concludes.