Close down those storesPosted: March 17, 2011
Archie Norman was, unsurprisingly, talking a great deal of sense at yesterday’s Retail Week Conference first day.
He advised retailers to close down stores every year – even in the good times. If retailers don’t close stores, he said, “they accumulate the walking dead”. Businesses should always be run as efficiently as possible, in good times or bad.
Having managed a business whose strategy was to open more (and of course more profitable) stores in order to
mitigate leverage high essential central costs, I’ll add another learning – not an original thought, but a true one: bad shops don’t turn good. If a store trades in year one at more than 10% below its Year One sales plan, it should be closed. We all know that a great manager can make a great difference to a store, but if the bow wave of a well-publicised opening and the surge of accompanying public interest is unsustained, then by all means change the manager – within months – but after a year, face up to hard choices.
Of course, it isn’t easy to close stores down – financially, emotionally or practically. A great deal is invested in a new store, in effort and capital, and pulling the plug after an indecently short period may seem offensive. But a store that drags its life out, year after year, always bottom of the pile, never earning bonuses (the store no one wants to manage), and invariably adding the hidden costs of excessive management time on to its already paltry bottom line – the store that is doing bad business is bad for your whole business.
Unfortunately, closing stores isn’t easy. Quite aside from the internal cost of write-offs, and the dumb paradox that biting the bullet visibly may hurt the young exec’s career more than soldiering on and doing the best s/he can in the circumstances, getting out of lease commitments is exceptionally hard in the UK. 10 or 15 year leases are better than 25, but still too long.
Upward-only rent reviews, based on the evidence created by one retailer who is cresting the wave will hurt other retailers, and can ultimately weaken whole town centres. If phone shops, coffee shops or fashion boutiques have set record Zone A rentals, in due course the centre’s mix will be weakened and whole retail categories eliminated, as stores with low or relatively fixed margins find it harder to compete. In a saner world, it would be easier to close stores, and easier to open new stores as well – a greater use of sales percentage-related rentals would help (and be more realistic than, say, capital contributions).
Because carrying out necessary surgery within a rational time-frame is so difficult, ugly solutions like CVAs and pre-packs have emerged – in effect acknowledging that there is insufficient room for negotiation (“we don’t want to set a precedent”), and that the only way to survive is to hold a gun to landlords’ (and other creditors’) heads. As Philip Green acknowledged yesterday, “Those are the rules of the jungle”.