THE MANY CLOAKED COSTS OF CLOSING A STORE...

Is it easy to close a store? The many cloaked costs

The implications of closing a store can be severe for a retailer, as much as for the store employees and customers

We have seen many reports in the media of late announcing that retailers are consolidating their operations. The retail rush witnessed a few years ago involved many retailers ramping up operations fast by getting into a store-opening spree. Grabbing retail space before competition could lay their hands on the same space was the top-of-the-mind concern for the aggressive new retailers. Ditto when it came to getting people, who were poached from competition at high costs. The rush was about becoming the largest or the most spread out organisation with a national footprint, or becoming the biggest in turnover; but it was never about becoming the most profitable. Retail Infrastructure costs were at their highest in the past two years. However, almost three years after many large companies started their retail operations with the singular objective of attaining scale by reaching a fat number of operating stores, many are now falling by the wayside, unable to perform to expectation. Many stores are rendered unprofitable because of lack of footfalls or inadequate conversions or smaller ticket sizes.

It is now time for the stakeholders to take a stern look at the state of affairs in order to ensure better figures in future. Many enterprises have decided to halt their expansion plans. Many have started closing unprofitable stores. For a layman, closing a retail store may seem easier than opening one, but for the industry professional, the reality is different. Closing a store comes with many pangs of pain and at huge costs as well. When one decides to close a store, one starts with reducing the store’s stock levels and stops the influx of fresh merchandise. No planned replenishments would take place and hence the store management personnel would decide to mark down prices for clearance. These are silent mark-downs and never pronounced through a sale. This is the first step in liquidating the stocks. If time is short and the agreed term of notice to the landlord for vacating the premises is drawing to a close, then the merchandise will be transferred to another store. This transfer process involves three kinds of costs — the cost of transportation, the cost of shrinkage and the cost of marking down excess stocks in the new store, which would lead to a heavy loss.

A store facing closure cannot easily vacate and relocate. As most of the retail premises are leased, the terms entered into with the landlord are such that there is invariably a clause that has a notice period. Some agreements have a lock-in period, which is the worst case scenario. This means that the property cannot be vacated by the store management for a year or two. If one wants to move out despite this notice period, one needs to pay the rent for the agreed lock-in period. That is the high cost of real estate incurred even if one wants to close an unprofitable store and this cost gets loaded on to the profit and loss statement of the company. When a store closes down, it also incurs a good amount of non-recoverable capital costs. This part of the loss for the organisation is huge and it can form more than 50% of the total amount of loss, depending on the format of the store. Almost 40% of the total capital costs are written off as non-recoverable losses on capital expenditure made on the store. These spends relate to the capital expenditure made on furniture and fixtures, IT, store equipments, electrical fittings and HVAC, store surveillance equipments, etc. When many of these equipments are rendered not reusable, the losses are even more, which can make the organisation bleed beyond redemption.

The organisation may lose many people as it closes its non-performing stores for no fault of the employees. Money spent on employee training will go down the drain. Once poached at high costs, employees are now left in the lurch. In many instances, compensation is paid to take care of their severance with the organisation. Notice pay to all employees who are retrenched also would run into huge amounts. The higher cost is about the falling morale of employees in the performing stores as well, where the rub-off effect will be felt in a large measure.

The biggest cost of closing a non-performing store is that of disillusionment in the minds of the customers. As customers come to know that a store is being closed, it sends negative vibrations and their sentiments dive to lower levels. The customers may instantaneously relate the bad performance to the organisation itself rather than only to the store in question. The customers earned by the store so far will have to turn to other stores belonging to competition. If the closing of a store is not communicated well, customers may face the problem of visiting the store without knowing that it is already closed. Though customers may have a short memory, the disappointment of visiting a closed store is hard to forget.

Retailers at times make mistakes in choosing the right location. Such mistakes cannot exceed say 2% of the total locations signed up. The costs of closing a store are very high and they would impact the organisation a great deal and in a larger measure they would impact the store employees and the customers. A rush may pay in terms of expanding retail space faster than competition or it may pay in terms of gaining visibility in a short span of time, but it definitely does not pay when it comes to understanding customer needs faster. Invest money in knowing customers and what they need and not put big monies to book a property in advance, getting the better of competition, for customers can carry a divorced feeling when stores close in their own ‘living catchments’.

- Dr. Gibson G Vedamani

Published in DNA Newspaper, Mumbai on 16/10/08

http://www.dnaindia.com/authors/gibson-g-vedamani