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Consolidation Considerations: How Retailers Can Minimize Losses from Store Closures

May 12th, 2017 | Posted by APT in Retail

During the 2008 recession, 6,200 brick-and-mortar stores closed. In 2017, total store closures are expected to surpass that number, climbing to over 8,600.

Retailers are undeniably facing headwinds, from the growth of e-commerce and online competitors, the decline of the shopping mall, and shifting consumer preferences, among other factors. Yet, while the process of browsing and shopping increasingly shifts to online and mobile channels, consumers still make the majority of purchases in brick-and-mortar stores. Many retailers are already re-evaluating and consolidating their physical store networks in response to these challenges. But how can they drive maximum traffic to their remaining physical stores, and minimize losses from closures?

They must begin by making the most surgical closures possible to mitigate any resulting negative impact. The first step is to study the performance of locations that are candidates for closure, to determine which are truly underperforming. While some stores may lag in sales due to store-specific issues like employee tenure or manager performance, others may be affected by external factors, such as local weather events. Differentiating between these types of stores is key to making the right closure decisions.

Retailers must also consider which stores closures will result in the most retained sales, through both remaining physical locations and other channels. One effective way to inform network strategy is to examine past closures of similar locations and the subsequent transfer of sales to nearby stores and other channels. Retailers can compare the impact on stores near a closed location to similar stores in areas that did not see a store closure to understand the net impact on the chain. From there, a retailer could predict how much business they would retain following the closure of a similar location.

It is also critical for retailers to understand where their most valuable customer segments are concentrated, in order to make informed decisions about which locations to close. Retailers can trial different iterations of marketing offers or campaigns with customers affected by closures to determine which are most successful in driving traffic to nearby locations and other channels.

A number of large retailers have taken the approach of closing a store, then measuring the effect of the closure on the sales of nearby locations. Many have found that while sales increase at stores in the proximity of closures, sending mailers with coupons to affected customers can amplify this increase and further drive traffic. Further, this approach enables the retailer to understand the characteristics of nearby stores that experienced the greatest lift in sales, and leverage these insights following store closures in other, similar markets.

In addition to outreach to affected customers, retailers can try to minimize the impact of store closures through offering new services and policies. For example, a retailer could test a price decrease at nearby stores following a closure to determine first, if the program attracts enough new customers and retains enough existing ones to recoup the cost; and second, to understand whether it drives enough traffic to offset losses due to the store closure. They could also trial online policy changes, like reducing shipping rates, to encourage customer shifts to online channels.

Besides analyzing the impact of their own closures, retailers can also use testing to optimize strategic responses to competitor store closures. Executives can take any number of actions in response to competitor closures, including increasing marketing spend, inventory levels, and price, but testing each of these options is the quickest and most reliable way to identify the strategies that drive the highest transfer of sales. Armed with this knowledge, retailers can then refine their responses to competitor store closures to capitalize on the opportunity to capture more market share.

Network consolidation decisions are quite complex, but critically evaluating the impact of both their own store closures and those of their competitors can help retailers retain as much business as possible. Based on these insights, retailers will be empowered to make confident network consolidation decisions that will ultimately drive traffic and fuel growth.

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