down which stores aren’t doing well
and should be closed. Instead, breaking
down individual store expenses by type
and source can help identify which
costs truly would end with the store’s
closure and which are structural costs.
Because the goal is to close only stores
whose closures will add value to the
overall company, it’s very important to
determine which profit-and-loss (P&L)
lines are correlated directly to store
count and metrics, which are
contractually fixed, and which
have high or low elasticity.
Retailers should keep in mind
Step 1: Study the Network Effect
that many P&L line items that influence
a store’s four-wall EBITDA will remain
in full or in part when that store closes.
In thinking about store closures, the
first step should be to examine the
network effect, which means figuring
out how a specific store closure would
affect sales within a network of similar
stores. That kind of analysis requires
casting a wide net, and should include
both the company’s own stores, whose
openings could cannibalize its adjacent
locations, and competitors’
openings that also detract
from a store’s top line.
The store operation teams should
already have on hand weekly sales
trend data for the past several years.
They can use that information to
identify weekly sales impact from
a competitive opening or identify
the lift from a competitor’s closure.
An understanding of those impacts
should inform assumptions around
reverse cannibalization, or what
percentage of sales would be retained
in-network if a competitive store
closed. In dense markets, especially
among specialty retailers, the authors
forecast and have experienced as
much as 40 percent sales transfers
from closings of nearby stores.
Step 2: Distinguish Between
Different Types of Costs
The next step is to separate directly
variable costs (DVCs), structurally
variable costs (SVCs), market-variable
costs (MVCs), and fixed costs.
DVCs seem simple on the surface. These
are costs that should go away if a store
is closed. Yet the trick is to understand
when and where allocations may be
skewing DVCs and to then determine
when to “repack” an allocation.
A common example is evenly allocated
distribution costs. For instance, a
store 1,000 miles from the distribution
center is much more expensive to
supply, so costs should be reallocated
such that each store’s distribution
charge is more in line with the actual
cost to supply it. Such a reallocation
would ensure more-realistic DVCs
when making closure decisions.
SVCs represent the most nuanced
part of a store-closing program. They
frequently involve corporate support
functions like payroll processors,
legal support, and accounts payable.
Capturing and addressing unallocated
SVCs can generate meaningful
savings not otherwise in the scope
of a store closure program.
For instance, if the analysis determines
that only 2 or 3 percent of stores
should be closed, there likely would
be minimal impact flow through
to the SVCs. But in a program to
close 10 percent or more stores, the
aforementioned departments could
perhaps be reduced by 7 or 8 percent.
Those savings opportunities can
be meaningful—or meaningfully
overstated if the analysis didn’t factor
in elasticity correctly. It’s important
to recognize that capturing those
$8,560 $8,104 $8,056
RE TAIL SQUARE FEET PER CAPITA RE TAIL SALES PER CAPI TAL
FIGURE 1: RETAIL SALES AND SQUARE FEET PER CAPITA
Once a store’s true cash
contribution has been
determined, it’s time to start
making closure decisions.
U.S. AUSTRALIA U.K. FRANCE GERMANY CHINA
Sources: ICSC, Knight Frank Research, GGP's September 2016 Investor Presentation