Why and how to close underperforming stores

Retail square footage across the US is simply overcrowded. Store closure is often not discussed in the context of property optimization. When determining which stores should close, it's important to consider all types of data, not just revenue.

“There is no silver bullet for increasing a firm’s value, but for a lot of firms closing stores is more beneficial than opening stores. When firms tend to close stores they typically shut down unprofitable stores and this allows them to refocus resources elsewhere.” - Sriram Narayanan, assistant professor of supply chain management at Michigan State University

True store performance factors

Store closure is an inevitable component of developing a successful organization. Determining whether or not to close a store is heavily dependent on foot traffic metrics. Several key metrics help provide insight on brand performance at the store level and will inform the longevity of your business. Here are the metrics we suggest you consider:

  1. Foot traffic - What are the store's busiest and slowest hours? Foot traffic is the number of people that walk into your store during a given hour, day, month, or year.
  2. Conversion rates - Are conversion rates and foot traffic correlated (a.k.a lower conversions during higher traffic)? The conversion rate is the percentage of visitors that convert to customers by making a purchase.
  3. ATV (Average Transaction Value) - How much do shoppers usually spend? The average transaction value is the average amount your customers spend.
  4. CAC (Customer Acquisition Cost) - How much does it cost to drive shoppers to your location (above or below your average)? The customer acquisition cost is how much it costs you in marketing spend to acquire a new customer.

External factors

Other important variables when deciding to close a store is to look at external factors such as weather and location type. Weather can impact consumer spending in regards to sunlight, or lack of it (ex. gloomy weather can lower foot traffic). The stores location can determine whether the location is an opportunity or destination location. Opportunity locations often have lower conversion rates, however this does not directly translate into lower sales. Conversely, destination locations see lower foot traffic, but higher conversion rates. This boils down to the consumers intent to purchase. It's important to weight these external factors when analyzing your brand's performance before making a final decision in regards to your store(s).

Top practices for closing a store

Communicate with investors
Organizational changes can invite scrutiny from stakeholders. Control the narrative with clear communication about the changes you're making so company values aren't affected.

Have a PR plan
The last thing you want to happen is to negatively affect your brand. Your press release should contain high-level information regarding why the store was closed.

Communicate with employees
As soon as the decision to close the store is finalized, it's important to communicate with the store employees as soon as possible. The longer you wait to announce the decision could negatively affect the PR of your brand if your employees feel blindsided by the change.

Schedule a debrief
After your location has been closed, the most effective thing you can do is schedule a debrief. You may want to ask your operations or innovation teams a few questions after reviewing your data audit such as:

  • What could you have done as an organization to spot the low-performing store earlier?
  • Did you choose the wrong location when opening the store?

Without a set of metrics capturing store performance data across all your store locations, making informed decisions about opening and store closings is nearly impossible.

Download our eBook below to learn more about how to make confident decisions for your brand's physical footprint.

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