Trading Spaces:Changing the way retailers think about stores

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Trading Spaces: Changing the way retailers think about storesBack in the 1990s, at the dawn of ecommerce, dire predictions were made about the end of physical store space. Today, although bricks-and-mortar storefronts are nowhere near extinct, they are dwindling in some formats. Conventional wisdom holds that the UK marketplace is “overstored”—there is simply too much square footage relative to the money which consumers spend in-store for every retailer to generate acceptable profits. Vacancies across high streets seem to support that conclusion: Shop vacancies are running at close to peak levels at 14.5 percent.1 A raft of bankruptcies, administrations and CVAs (company voluntary agreements), have made headlines of late and there will be more to come.

Part of the problem lies in the heritage of the industry: Retail has a cultural bias toward driving store openings because property development executives are incentivised on opening new space not on long-term profitability of that space.

The industry also suffers from a “more is more” attitude toward range expansion, increasing SKUs even as profit margins diminish. Likewise, many commercial buyers are rewarded based on gross margin pounds. All of this adds up to more and larger stores accommodating a wider range of product.

That’s not to say, however, that retailers have too much space per se. But most do need to radically rethink their overall store portfolio, adapting to an integrated, multi-channel environment. Those that fail to do so risk joining the ever-growing list of brands disappearing from high streets throughout the country.

1 Retail Week, 26 June 2012, “Shop vacancy rate drops in May”, http://www.retail-week.com/in-business/policy/shop-vacancy-rate-drops-in-may/ 5037985.article?referrer=RSS

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Overstored? Weak consumer confidence. High unemployment. Lack of available credit. Stagnant disposable income. Given today’s economic climate, retail sales volumes will continue to slow. Combine that with rising costs (business rates, minimum wage and prime rentals) and profitability will be under pressure for most stores.

Turbulence in the economy makes it even more crucial for retailers to get their store presence right. Doing so does not necessarily require closing physical stores as a cost-cutting panacea. Instead, it entails changing the cultural mind set of retail operations from one that prizes expansion (both the bricks-and-mortar kind and in overall offerings) to one that considers the entire purchasing ecosystem with the ultimate focus on profit.

Thinking differently is one thing. Retailers need to follow through by acting differently—managing virtual space with the same methods they apply to physical ones. For instance, selling online has the effect of increasing the total space—i.e. the physical plus virtual space—in every location the retailer operates. Having additional stores in the same catchment can drive sales up to a point. Thereafter additional space is dilutive. The effect with virtual space is the same: from incremental to dilutive.

Retailers should review their physical estate and what role it plays in complementing the virtual estate as part of an integrated multi-channel experience. In a network of bricks-and-mortar stores, some locations should serve as destinations, others as convenience points providing pick-up services. Flagship stores need to up their game considerably, going beyond the expected (apparel fitting, personal shopping assistance) to offer the extraordinary, setting them apart from the rest of the high street.

But which stores are needed now? In three years’ time? In five years’ time? How vulnerable is each product category to further shifts to online and mobile commerce? Which customer groups are going to lead the shift to further online penetration? What are the implications on physical space of “Showrooming”, “Click and Reserve”, “Click & Collect” and other multi-channel behaviours? Retailers need to combine the role each store is going to play in the customers’ shopping journey with economic analysis and use it to assess all stores.

This analysis examines the vulnerability of the product and customer base migrating further online. Easily comparable products, digitisable products and products where instant gratification is not required are all highly vulnerable. But even the sceptics have to admit that they were wrong that fashion and fresh foods would not sell online. Practically all products are at risk of further online penetration – but to what degree? Each retailer needs to make an assessment of their situation. They also need to answer a number of critical questions about their stores. (See Figure 1 depicting the decision tree)

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Is the store profitable over the next 3-5 years? (including ecommerce revenue and central costs)

STARTVulnerability assessment to online migration

Can the store be made profitable?

Does the surrounded shopping area have a viable (>3yr) future?

Optimise range & space Investigate following options

Shift “critical role” to other store(s)

Can the lease be exited within 3 years?

Will a space optimisation programme pay back in time?

Can the store be assigned, sublet or a lower rent negotiated?

Is store over spaced?Does the store play a critical role in the store/supply chain network?

Undertake store performance improvement process

Shutter store

Property solutions•Subletsurplusspace•Seeifthelandlordwilltakebackspace

Value Proposition Solutions•Enterrelatedcategories(ownbought)•Developotherformatstoutilisethespace•Offerconcessionsinrelatedcategories•Demonstration/trialareas•“GeniusBar”serviceconcept•Additionalservices(ownorthirdparty)

Multi-channel solutions•Click&Collectservice•Internetorderingpoints

Cost solutions•Buildfalsewalltoreduceapparentsizeofstore

Community solutions•Providecommunityspace(policestation,meetings)•Provide“marketstall”spaceforlocaltraders

Does continuing to trade cost more than closing?

Assign, sublet or negotiate lower rent

Exit store Optimise space

No Yes

No

NoYes

Yes

No YesNo Yes

No

No

No

Yes

Yes

Yes

No Yes

A. Is the store profitable? To start, retailers need to consider which revenues to include and what costs. Consider that most non-food sales are web influenced at some stage of the purchase journey, but still most are finalised in-store, retailers need to reconcile how to account for those sales. They need to use the same approach for Click & Collect.

One solution: Add all online sales made by customers living in the local catchment area to the sales completed in-store, less returns.

B. Does the shopping area in which the store is located have a viable mid-term future (more than three years)?

Retailers are closing stores as leases expire or by exercising break clauses. Towns will be blighted with too few trading stores to remain attractive to customers or other retailers.

For borderline locations, retailers need to determine if there are local actions which they could support, such as the appointment of a Town Centre Manager, who could help transform the outlook for that location.

C. For non-profitable stores and non-viable locations, does the store play a critical role in the store / supply chain network?

Is the store the location where all regional training is carried out? Or does the closing of one store load the remaining stores in the area with unacceptably high central costs? In such cases, additional analysis needs to be carried out to mitigate the additional cost burden. For instance, should there be a parallel reduction in central costs or can the distribution network be reconfigured to spread the cost in such a way as not to have such an adverse effect on a group of stores?

Figure 1: Are you overstored? Questions to address

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For stores retailers want to keep, but which have excess space, investigate these options:

Property solutions•Canthestorebedividedupintotwo

and sublet one?•Willthelandlordtakebackthestore

as part of a wider redevelopment and the retailer take less space?

Value Proposition Solutions•Arethererelatedcategoriesthatcan

be sourced by the retailer?•Arethereotherformatswithinthe

group which could take space?•Cansomespacebeofferedona

concession basis in related categories?•Canthecustomerofferbeenhanced

by adding demo/trial areas?•Cananexperthelpservicebeadded?•Canadditionalservicesbeofferedusing

in-house resources?•Canadditionalservicesbeofferedby

a third party (coffee shop, etc)?

Multi-channel solutions•GivespacetoClick&Collectservice•Allowforinternetorderingpoints/

interacting with the online presence

Cost solutions •Buildafalsewalltoreduceapparent

size of store

Community solutions•Providecommunityspace(police

station, community meeting area)•Provide“marketstall”spaceforlocal

traders

With their space allocation strategy sorted, retailers need to examine their range more closely, questioning a deeply embedded tendency toward adding more products in the face of dwindling profit.

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The rationale: Most sales come from the so-called long tail2—the much larger number of “niche” items that do not constitute best sellers. To be sure, there is a market for these items. But retailers need to break out of the “range for range sake” mentality and consider instead if a profit can be made selling a given item.

Successful retailing is about being an “editor of choice” for the customer; making selections to minimize risk for the shopper. After all, how can customers make a sensible choice between 179 irons at Argos and 137 at Tesco Direct and 22,456 search hits on Amazon.co.uk in the Kitchen and Home Department? 3 Adding an extra product just adds extra space into the market and dilutes the economies of scale in buying, lowering gross margin.

Naturally, if the product in question is digital, then the cost of holding the stock is almost zero (digital storage space) and the distribution cost is zero. The cost of selling such products online is practically zero; so a very attractive proposition. However, if it is a physical product then there are real costs, i.e. storage (warehouse space) and pick, pack and ship and potentially returns costs.

For those retailers that decide to expand SKUs in the face of declining profit margins, they should consider that in the “near-tail” (low sales per SKU), costs can be decreased by having only one stocking point in the whole chain, or calling off the product when it sells from a wholesaler. Click & Collect may not be the right solution unless a realistic delivery charge is either built into the price or explicitly charged—there is still the cost of singles picking, delivery to store, store space to

hold the product until the customer collects and staff cost to manage the Click & Collect area in-store.

In the “far-tail” (almost no sales per SKU), retailers should not seek to stock such items at all. Where a general merchandiser feels that offering such products is essential then it should be done via a marketplace with the retailer taking a commission for linking the consumer to the supplier. However, in all cases retailers are increasing the virtual space.

In short: Choice comes at a cost. “More is more” no longer holds in today’s environment. Instead, retailers need to take a hard look at the spectrum of their offerings and ensure they are in line with their portfolio of stores—physical and virtual.

Rethinking spaceThe death of bricks- and-mortar retailing has been greatly exaggerated. But the need for significant reinvention is clear.

That reinvention starts by breaking a cultural bias toward expansion—in the estate footprint, physical SKUs and in online offerings—and viewing store allocation through a lens of an integrated, multi-channel environment. Those that act now will be in pole position to gain real competitive traction.

2 The Long Tail, Wired Magazine: http://www.wired.com/wired/archive/12.10/tail.html

3 Company websites; www.argos.co.uk, www.tescodirect.com, www.amazon.co.uk

Chasing the tailSome retailers, particularly general merchants, have lost focus when it comes to product range. But even specialists can be seduced by the false argument of choice thanks to a cultural bias toward pursuing incremental sales.

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To learn more about rethinking stores contact:

Greg P. CasterSenior ExecutiveLondon, UKgreg.p.caster@accenture.com

Julian AllenGlobalRetailResearchLeadLondon, UKjulian.allen@accenture.com

Matthew A. WrightManagerLondon, UKmatthew.a.wright@accenture.com