del 2 Earnings up, stores down: Why successful retailers close locations

Why successful retailers such as Best Buy, Walgreens and Dunkin’ are closing locations

(IStock illustration by Alexis Manrodt)
(IStock illustration by Alexis Manrodt)

By the look of things, Best Buy had a great winter. Domestic revenue surged 11 percent in November, December and January to $15.4 billion.

But in announcing the good news, the electronics retailer said it would lay off 5,000 full-time workers and ramp up store closings. In the crosshairs are 450 locations with leases expiring in the next three years.

“There will be higher thresholds on renewing leases as we evaluate the role each store plays,” CEO Corie Barry told analysts on an earnings call.

Best Buy isn’t alone. Across the country, retailers with great earnings are consolidating stores.

Walgreens, for example, is subleasing stores, including 16 in New York City, despite second-quarter revenue rising 4.8 percent to $32.8 billion.

And Dunkin’, which saw profits tick up in the pandemic-wracked third quarter before it went private, is closing some 800 locations.

“Even though a company’s earnings are positive one quarter, that doesn’t necessarily mean that previous retail locations were working for them,” said Richard Skulnik, a partner at RIPCO Real Estate. “That’s a clear distinction that needs to be made.”

In part, the closings reflect shifts caused or accelerated by the pandemic, as customers increasingly shop digitally. For Best Buy, online sales increased 90 percent year-over-year and made up 43 percent of the company’s domestic sales in the quarter ending Jan. 30.

Pre-pandemic, online sales accounted for 37 percent of small businesses’ revenue. In February, it was 57 percent, according to a survey of 550 businesses by Kabbage, an online lender owned by American Express.

One-third of those surveyed planned to expand digital operations to supplement or replace in-person operations.

“Throughout the pandemic, many retailers have realized that they may have too many stores in their brick-and-mortar portfolio,” said Michael Wiener, the president of Newmark-owned Excess Space Retail Services, which helps retailers get rid of unwanted square footage. “I believe over the next few years, there will be a lot of housekeeping where retailers reevaluate their fleet and both strategically expand and shutter underperforming assets.”

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Those changes may vary geographically. Studies find that in the U.S., with its consumer-driven economy, gross leasable shopping center space per capita is 23.5 square feet. That dwarfs 4.6 square feet in the U.K., 3.8 in France, 3.4 in Spain, 2.8 in Italy and 2.4 in Germany. For U.S. metropolitan areas, the figure is a startling 46.6 square feet.

Still, that does not mean America has too many stores everywhere.

“In some categories, we could be underserved,” said Ryan Butler, partner at Stan Johnson Company, a Tulsa-based commercial real estate firm. “And then there’s areas where people are moving out of [and they become] over-retailed.”

Matching retail square footage to migration and shopping patterns is a constant battle for retailers, developers and landlords.

“The natural evolution of things is that people move, people’s buying habits change, patterns and areas change. And so it’s a constant state of flux,” Butler added.

For some, these closures have been a long time coming, and they just happen to hit during a reckoning for retail. Take Dollar Tree, which announced in 2019 it would close 400 stores. In fiscal 2020, its gross profit increased 10.6 percent to $7.79 billion — not just because underperforming stores were closed, but also because discount stores in general did well during the pandemic.

Although store closures have traditionally been a knee-jerk reaction for retailers seeking to cut costs, the process has become more strategic.

Some stores are traditional shopping hubs, while others are distribution centers or experiential flagships. Bed Bath & Beyond, for instance, is converting 25 percent of its fleet into fulfillment centers.

Other brands are rethinking the type of store that works best and, in some cases, shifting toward small-format neighborhood destinations. Gap is closing 350 locations (largely in malls) and Macy’s is cutting 125.

The process of evaluating retail locations is perhaps harder than ever because it’s about much more than sales figures now.

“The bigger question is, what is this store? What is it doing from a strategy perspective?” said Scott Hessell, director of the Terry J. Lundgren Center for Retailing at the University of Arizona. “Keeping ahead of these changes in how consumers are engaging with a brand [is vital]: in the store, online, at the curb, picking up at lockers, buying via TikTok.”