In this article we will discuss the most common reasons retail stores are closing.
Is it a Bad Sign That Stores Are Closing?
Although most of the time closing a retail store is a bad sign, this is not always the case.
Retail stores start closing for many different reasons, such as over-expansion, cash crunch, brand related issues, mall related issues, economic and demographic reasons.
In many cases you will find the same retailer that is closing a location is actually opening a new one in another place. This is because opening and closing stores is part of a retailer’s expansion strategy, and choosing the right locations to expand is key.
Top Reasons Why Retail Stores Are Closing
1. Over-Expansion
According to Howard Schultz in his book Onward, at some point in Starbucks’ life it has expanded so aggressively that the brand started losing its standards and essence along the way.
Not only stores started cannibalizing each other and becoming unprofitable, but with the over-expansion the teams were not trained properly and the stores were losing their “soul”, as he put it.
Read More: Cannibalization: A Side Effect of Retail Growth
This has prompted him to return back to his role as CEO and started closing some of the stores and bring back the brand to its glory days.
Retailers have to keep growing their business, and they do this by opening new stores to acquire bigger market share.
Sometimes, though, they over do it.
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In the United States this over-expansion has gone too far, that by 2018 the U.S was having the highest retail space per capita in the world at 23.5 square feet per person.
At some point, when new stores start being less profitable for the retailer or even make losses, store closures begin.
Read More: How To Expand Your Retail or Ecommerce Business
2. Cash Crunch
Managing cash flow of a retail or ecommerce business is a very critical task.
This is because most of the cash is tied down in inventory, besides having big cash payment obligations every month, from rent to payroll to payments to suppliers.
If a retailer is not tracking & managing their cash regularly, and aligning it with their purchases, cracks will start to happen in the business.
Cash problems can arise due to bad inventory management practices or bad cash management habits. If the store owner is taking more money out of the business than it can tolerate for example, out of the assumption that profit equals cash, problems sooner or later start showing up.
Low or negative cash balance will lead to:
- Defaulting on rent payments
- Defaulting on loan payments
- Inability to buy new inventory
- Inability to make payroll
- Lower sales due to less inventory freshness
If this reaches an advanced state, you suddenly find the business in a gridlock. Not being able to buy new merchandise, while also falling behind on sales for the same reason.
Suddenly everything stops to work and there are only 2 ways out:
- Getting new investors onboard to pump in fresh working capital
- Closing the business
Failing to convince new investors to join will lead to stores closing down.
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3. Irrelevance of The Brand
I’ve recently noticed a trend in the types of stores that are closing. Most of them are the good old big department stores that we grew up to know.
Fashion has been evolving more towards young, hip brands and specialty retail.
Most of the multi-department retailers started to be less relevant to the new generation and less trendy.
There is a big difference between the fashion that you find at Bershka and Pull & Bear vs. the fashion at Debenhams and Marks & Spencer. They failed to keep track of the young audience and its taste and failed to cater to it.
Not to mention that operating such big stores is very costly. So if they are not able to generate the required revenue they won’t survive and will start closing their stores.
4. Mall is Failing
I had to close a retail store because the mall wasn’t living up to its expectations.
As part of the expansion process, retailers go through a detailed due diligence process to open a retail store.
Part of this process is making financial projections on how this store is expected to perform and whether or not the quoted rent is justified by the expected sales per square foot.
After opening, the picture gradually start to materialize, and we get to know if this mall will perform or not. Usually we don’t expect to breakeven from the first year, but growth trends in the store sales and its traffic give us an idea of what is to come.
From my experience, the best malls are the ones where the operator puts in the effort to bring in traffic to the stores, and maintains very high standards of operations, which makes the location attractive for both, retailers and shoppers.
Some malls, however, don’t do that..
When this happens, retailers start to get out of the mall. And when a lot of them go, the mall just fails.
I’ve also had to close a store at a mall where the standards were very high but the rent was not in line with the traffic the mall was getting. Retail is a numbers game, and when the numbers don’t work out, we just have to leave and close the stores.
In fact, the picture above is from one of the best malls in our area, that is run by the best mall operator. However, one by one, retailers started to close, because the traffic has been dropping for economic reasons, yet the mall operator insists on charging the same rent.
5. Demographic Changes in The Area
Over the years people start to shift their locations for many reasons related to jobs, climate, taxes,…etc.
This shift in population usually brings with it store closures in the places where people are leaving and openings in the places where people are moving to.
Sometimes the shift is in the demographics. For example an area where people are aging and the younger population is getting less by the day, will also experience lower consumption levels and hence will become unprofitable for a lot of retail brands.
6. Recessions
Recessions bring with them lower incomes. Lower incomes lead to lower consumption. Lower consumption means lower sales. Lower sales mean store closures. Store closures mean less jobs. Less jobs equals even lower incomes…
It’s a cycle that keeps going for a while and needs to be broken.. usually by a government stimulus program.
Due to the nature of our economic system and how credit works, recessions are bound to happen from time to time. A retailer who expects their business to stand the test of time should therefore be prepared to run such a business during a recession, until it runs its course.
Read Also: Managing a Retail Business in a Recession
Are Retail Stores Closing Due To Online Shopping?
There is no doubt that online shopping has been growing at a high pace in the last few years.
Having said that, online shopping also still contributes very low to the total retail sales (ca. 11-12%). Which doesn’t really make it the main reason retail stores are closing, but it is quite an important contributor especially for stores that sell the same products that are found cheaper online.
This is also why most of the big to protect their marketshare.
What we have seen is that the movement online didn’t bring in new sales, but rather shifting part of the previously existing sales to online. This of course has lead to some store closures where sales have been affected the most.
In fact, a lot of pure play online retailers started experimenting with brick & mortar locations, as shopping is still being majorly done offline even if initiated online, and customers trust brands that have a physical presence more.
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Bottom Line
There are many different reasons retail stores are closing and most of them are financially related. Retailers have to adjust their growth strategy and store portfolios as the economy shifts and demographics and shopping habits change.
Read more articles on Retail Growth Strategy
