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Outsourcing turns store closings into positive events

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By Richard P. Edwards, redwards@gordonbrothers.com

Real estate portfolio optimization has become standard practice for retailers and, in the current environment, store closings often outnumber openings. In many cases, closing stores is a proactive move. For instance, healthy retailers strengthen their positions by closing under-performing stores and relocating stores within a market is an ongoing process when retailers review leases up for renewal or look to improve their position in the area.

However, the complexities and challenges of closing or relocating stores make it cumbersome for everyone from a store manager to the corporate office. Even retailers with successful operations and excellent procedures for opening stores describe closings as difficult experiences that drain valuable resources and distract from the core business.

The key to transitioning that potentially negative experience into a positive outcome is utilizing proper processes and understanding value. Each closing has unique characteristics but the processes that enable a retailer to achieve maximum recovery remain constant and consistently yield positive results and a 100% sell-through rate. At Gordon Brothers Group, based on efficient and effective store-closing experiences across all retail sectors and formats, we’ve identified the following critical processes:

Plan strategically: Evaluate store-specific data and establish realistic expectations for recovery. Ideally, you should analyze previous store-closing sales with comparable inventories and institute an efficient wind-down program that controls payroll, advertising and operations expenses to maximize the net recovery. When the store-closing event is outsourced, define a sum-certain recovery that gives the event manager a stake in the outcome.

Control presentation and prices: Avoid costly mistakes that leave shelves bare and adversely impact sell-through rates. Traditionally, retailers stop inventory replenishment to a location that is closing, leaving the store with a very poor presentation. The better tactic is to augment inventories with strong-selling product. For example, when a grocery store closes it will achieve more profitable returns by continuing to stock high-turning staples, which keeps traffic returning to the store and promotes sell-through of slow-turning product. Another mistake is unilaterally slashing prices across all product categories. Instead, current fashion or more-desirable products should be discounted less than slow-turning merchandise that must be priced at deeper discounts.

Seize opportunities: When a closing is due to relocation or additional stores remain open in the market, the store-closing event offers an opportunity to transition customers either to the new store or to other stores in the market. In-store signage and store-level promotions are effective tools for incenting shoppers to visit other locations. Additionally, store-closings present opportunities to increase sell-through of aged or clearance inventory from ongoing stores or distribution centers. Historically, sell-through and recovery rates are higher at a store-closing event than if the merchandise was left on clearance at an ongoing store.

Play by the rules: However, local jurisdictions often prohibit augmentation of inventories after a closing event has begun. Ironically, even retailers who have closed numerous stores are often shocked to learn permits are required and regulations differ in every town.

End strong: In addition to selling inventory to the final piece, you should recover maximum value for the store’s furniture, fixtures and equipment and leave stores in broom-clean condition, compliant with lease agreements.

Why outsource: Profitable recoveries come from strategic plans and processes that are considerably more complex than merely hanging a store-closing sign. Outsourcing to an experienced event merchant enables the retailer to achieve a higher recovery while expending fewer resources. In virtually every instance that we’ve experienced, the recovery value more than covered the cost of outsourcing.

Richard P. Edwards, principal & managing director at Gordon Brothers Group, a global investment, lending and advisory firm, leads inventory dispositions and manages financial due diligence for major retail store-closing events. He can be reached at redwards@gordonbrothers.com.

© 2014