E-Commerce Complicates Retail Store-Closure Plans

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Jon Graub: "When customers buy items online that are then fulfilled at that store for home delivery or in-store pickup, does the retailer count those transactions as store sales or e-commerce sales? The real estate team needs to know those numbers."

MELVILLE, NY— Before shuttering stores with less-than-ideal sales numbers, retailers should carefully consider the role those locations play in their broader e-commerce strategies, advises Jon Graub, a Principal at A&G Real Estate Partners, in an article in the November/December issue of the Journal of Corporate Renewal (JCR).

“If the store is a popular destination for online returns by customers in the trade area, how would closing it affect the chain’s e-commerce strategy?” writes the retailing veteran. “When customers buy items online that are then fulfilled at that store for home delivery or in-store pickup, does the retailer count those transactions as store sales or e-commerce sales? The real estate team needs to know those numbers.”

JCR is published by the Turnaround Management Association. In “Real Estate Game Planning Takes on New Urgency in Retail Restructurings,” Graub, a former Charming Shoppes real estate executive, emphasizes the need for clarity about real estate performance in today’s retail turnarounds.

Typically, the pre-restructuring real estate planning process includes:

  • ascertaining individual store profitability by closely reviewing both the retail company’s present-day financials and future projections;
  • carefully studying the marketplace dynamics to answer basic questions such as whether particular stores should continue to operate over the short term or the long term; and
  • setting the timetable for closure of underperformers.

Generally speaking, Graub writes, this basic methodology continues to be valid and positions retailers for a healthier future. However, the increasing role that e-commerce plays in many retail business strategies complicates the picture.

Studies show that up to 35 percent of customers who cross physical-store thresholds—either to make returns or pick up online orders—end up buying something else as part of the journey, Graub explains. “This is a big part of the reason that Nordstrom Local has just started accepting returns from Macy’s and Kohl’s,” he writes. “Likewise, Kohl’s now allows Amazon shoppers to make returns at Kohl’s stores as well.”

Real estate consultants need to do a deep dive with their retailer clients to understand any applicable e-commerce dynamics at individual locations, advises Graub, who has managed some of A&G’s largest lease-disposition and occupancy-cost-reduction projects, including RadioShack, rue21, Charming Charlie, and Charlotte Russe. “To be sure, some retailers have yet to launch significant online operations, in which case the analysis will be more conventional,” he writes. “Others are massively invested in e-commerce, and their brick-and-mortar locations function as much as showrooms and fulfillment centers as they do traditional stores.”

The article also includes tips on maximizing the performance of complex portfolios involving some combination of leased , owned and ground-leased locations. “Some retailers lose sight of the reality that longer-term ground leases—because they locked in low rents years or even decades earlier—still tend to be valuable assets,” Graub writes. “As counterintuitive as it might sound, the best approach can often be to renew such leases and put them on the market for sale.”

While store closures can sometimes be positive, the consultant adds, chains do need to pay close attention to whether other vacancies at the property run the risk of triggering a downward spiral. “In today’s retail marketplace the likelihood is greater that vacancies by important co-tenants—some of which have been stable, traffic-driving household names in retailing for decades—could undermine the viability of particular retail locations,” Graub writes. “In worst-case scenarios, such vacancies can allow other important retailers to take advantage of ‘kickout’ clauses in their leases that give them the option to close their stores or pay lower rents.”