Where Retail Chains Miss the Mark
Decisions about store openings and closings often leave the stock market cold.(originally published by Booz & Company)
Title: Effects of Opening and Closing Stores on Chain Retailer Performance (fee or subscription required)
Authors: Raji Srinivasan (University of Texas at Austin), Shrihari Sridhar (Pennsylvania State University), Sriram Narayanan (Michigan State University), and Debika Sihi (University of Texas at Austin)
Publisher: Journal of Retailing, vol. 89, no. 2
Date Published: Summer 2013
How does a retail chain’s decision to open or close stores affect its value to shareholders? According to this paper, one of the first to examine the market ramifications of expanding or contracting the number of store locations, many chains fail to register any meaningful benefit from such moves. Some even lose value. A chain’s decision to open stores to compete in new markets or to close struggling outlets to stanch losses can have very different outcomes depending on a variety of factors, the authors say, including a firm’s advertising exposure, age, market share, and size. By understanding the impact these factors can have, chain managers can gain a better sense of how their decisions—and those of their competitors—will likely affect company value and stock market performance.
To learn how some firms strike the right balance in adjusting the number and location of their stores, the authors analyzed annual data, culled from several databases, on 132 publicly listed U.S. chain retailers between 1998 and 2009. After a series of regression analyses—which controlled for such factors as the level of industry volatility and the percentage of revenue generated from online sales—the authors found that a firm’s market share played a significant role in determining the impact of opening and closing stores. The higher the share was, the more opening new stores drove down the firm’s value and closing stores boosted performance. A similar pattern emerged with respect to a firm’s level of advertising: The more a company advertised, the more its value was boosted by store closings and driven down by store openings.
These results suggest that companies with a large chunk of the market, and those that advertise widely, should be wary of expanding too far beyond their core customer base. If they do, they are likely to reach more price-sensitive customers, generating less profit and causing investors to become concerned that the firm’s message is being diluted. Conversely, by shedding unprofitable stores and eliminating customers who are not aligned with their offerings or prices, these firms can expect to benefit from an investor assessment that any temporary drop in revenue will be offset by future increased cash flows.
A retailer’s age had no bearing on how opening new stores affected performance, according to the study. But as a company grows older, its value tends to be boosted by closing stores. Apparently, the market recognizes that the structural and organizational inertia that grips older firms makes it harder for them to respond to shifting consumer trends, and rewards older companies for strategically cutting excess locations and focusing on their core businesses. Thus, older firms can adopt a portfolio approach to store management and consider their retail outlets in the same light in which they consider products that have reached the maturity stage of their life cycles: Some should stay, and others should go. The authors provide a set of mathematical formulas to help retailers make portfolio choices and other decisions relating to openings and closings.
Finally, as a firm’s sheer size—as opposed to its market share—increases, in terms of physical locations, number of employees, and total square footage of retail outlets, both openings and closings tend to decrease company value, although the effect is greater with new store launches. Large firms thus face something of a quandary: They are penalized regardless of what change they make. The authors argue that because investors and analysts closely follow the moves of large firms, any change in strategic direction signals that the company is grappling with some unprofitable stores or underlying industry uncertainties. Therefore, these large firms may want to work with analysts to ensure that the market understands the reasons behind any changes in the number of stores.
The authors underscored the difficulties in making these decisions when they analyzed the impact of opening and closing stores on a firm’s value relative to that of its competitors. For example, 55 percent of the firms in the sample were unable to generate above-average value from launching stores, and 27 percent were unable to do so when shutting locations. And among firms that simultaneously opened and closed stores, 11 percent actually lost value from openings, compared with their peers, and showed no above-average performance from closings.
To effectively manage a contraction or expansion plan while staying in the good graces of investors, chains need to apply the analytic approach outlined in this paper, the authors write. And the good news, they say, is that this approach, built around the formulas that they supply to take account of the factors they’ve identified, can be relatively simple to implement.
The decision to open or close stores is a crucial part of chain retailers’ marketing and sales strategies, in turn affecting their partners and investors. And yet many retailers fail to generate significant performance benefits from either expanding or contracting. This paper outlines a way for firms to predict how their moves—and those of their competitors—are likely to affect shareholder value and company performance.
- Matt Palmquist is a freelance journalist based in Oakland, California.