Is bigger actually better?
The CEO of an independent grocery wholesaler noted some years ago that you can’t bank market share. He was commenting on the obsession of retail chains for the expansion of store networks as a strategy to build market share and sales by locking out competitors from prime locations, particularly in new or extending shopping centres. The management focus was on growing store networks which, of course, boosted sales and amortised buying and marketing costs.
However, the strategy also added extra overheads and contributed to the escalation in rents. Some chains even opted to open more than one store under the same brand in the same shopping centre. The strategy may have had logic for some retailers but, for many, it has caused and continues to cause long-term headaches.
The legacy issues of large store networks have been the key factor in many financial collapses, with retailers unable to carry underperforming outlets in an increasingly competitive market. Bloated networks have curbed the agility of retail chains to counter new global competitors entering the market and, no doubt, have stymied other initiatives and slowed down the development of dynamic online retail platforms for a number of years.
Now directors and management are pruning their store networks (some quite drastically) as they recognise that today it doesn’t make financial sense to have a store on virtually every corner – if indeed it ever did.
Retailers who have been pressing for pauses on rent increases or rent reductions may be better off in the short term, but store network management requires hard business decisions rather than sentimentality – or even blind faith that improved trading is only just around the corner.
Many chains have been forced to take those hard decisions as earnings are falling, often along with sales and market share. Myer and David Jones, which both decided they could forge new opportunities through opening new stores, have been forced to retreat, closing some locations and reducing floorspace.
So the rethink of real estate is from the top down in the retail industry. In some cases, it’s been necessary to ensure survival; in others it’s been to avoid the traps that have consumed other retailers.
Right-sizing bricks-and-mortar networks is now at the top of the strategic agenda of most retailers looking to control costs and ensure sustainable profitability. At the same time, retailers have to secure their customer base and as much of their market share as possible through changes to retail store concepts, store relocations and initiatives to move from the store-on-every-corner convenience model to a destination model.
Consistent with the challenge to think differently, Anthony Heraghty, who recently took over the CEO role at Supercheap Retail Group, has contended that traditional retail metrics are becoming increasingly irrelevant. In an interview with The Australian Financial Review this week, Heraghty claims traditional metrics – such as like-for-like store sales and sales per square metre – are becoming less useful as performance measures as e-commerce sales are growing as a larger share of revenue.
For Super Retail Group, online sales are currently around 7 per cent of total group sales and they are growing as much as 41 per cent, and around 9 per cent of customers of the retailer’s brands are shopping both in-store and online.
The group’s brands include Supercheap Auto, BCF, Macpac and Rebel, with around 700 stores. But Heraghty says the company is now refocusing on growing its customer base and increasing transactions without significant new store growth.
analysts and investors are still relying on same-store sales growth as a key measure of retail performance but it does not capture the growth of online sales.
Like-for-like store sales growth can be useful to a retailer internally to compare the performance of its stores and to keep a focus on improvement initiatives. However, Heraghty is right in pointing out that reliance on that measure without accounting for online sales growth runs a risk of misallocating resources, missing out on savings across the business and, most importantly, failing to understand and meet customer expectations.
Inside Retail Polls
Harris Scarfe has been put into receivership just months after it was sold to Allegro Funds. Receivers say the icon… https://t.co/SF4Mzd2jPx10 hours ago