Debenhams, H&M, Mothercare… no names are immune to the digital shakeout taking place in U.K. retail. We examine the critical questions retailers must address to ensure they are ready for the future.
L.E.K. analysis of three major U.K. retailers’ store closure programmes suggests that traditional rules for network right-sizing no longer apply.
The economics of store networks are rapidly changing in the digital age. We outline the key steps retailers should take to ensure they are well positioned for future growth.
The well-publicised high street store closure programmes are clear evidence of the shakeout taking place in U.K. retail. Since 2013, the percentage of internet sales has almost doubled, from 10% to 18% in aggregate, and this figure is even higher in some sectors. Along with well-publicised inflation in rent, rates and the minimum wage, this has contributed to a dramatic rise in net store closures, with 2,500 closing in 2018 alone. The closure programmes of Marks and Spencer, Debenhams, Mothercare, H&M, Zara et al indicate that even the most venerable household names are not immune.
There can be little doubt that the retail sector is undergoing a fundamental change amid advances in digital technology and changes in consumers’ shopping habits. Artificial intelligence and augmented and virtual reality are redrawing what is possible in terms of the customer experience, while online-savvy shoppers are demanding more choice and faster home delivery. Where once consumers principally visited their local stores — limiting the choice of retailers and products available — many now look online to digital and physical retailers, and to direct-to-consumer brands that can deliver products within hours.
The inexorable march towards digital has left many retailers fighting for survival, struggling to ensure that their store portfolio is the right size and shape to compete, and often using company voluntary arrangements to save their P&Ls.
In this new era, the traditional rules for store openings and closings are no longer obviously true. The economics of store networks are rapidly changing, and if retailers are to survive and thrive, they must redefine the role of physical stores and integrate interactions across all platforms to create a seamless, unified customer experience.
In this Executive Insights we look at the challenge of getting the retail network right, and examine the critical questions that retailers must address to be ready for the future of retail.
New rules for store networks
The overriding challenge for retailers is the integration of physical store networks with digital retailing. Online shopping has been around for more than two decades and the two channels are becoming steadily more linked, with consumers choosing freely between them to maximise convenience and obtain the best deal. The prospect of physical/digital integration has enormous implications for store networks, and to achieve the full potential of offline and online channels, the right network configuration is critical.
The growth of digital means that the traditional rules for store openings and closures no longer apply, and retailers must rethink how to create customer-centric propositions and economics that enable customers to research and discover new products, decide and purchase, and then review/share their experiences on social media — whether in the physical or digital store.
Store performance has historically been seen as a function of the local catchment area, with network decisions taken on the basis of factors such as local supply (e.g., distance to nearest own store and major competitors) and demand (e.g., affluence and footfall), as well as micro-locational factors (e.g., position on the high street, unit size). Historically, indicators for store closure candidates have typically included highly competitive catchment areas, small catchment areas with low demand, out-of-town retail centres, less affluent areas, high-cost facilities, oversized locations with too much space, and locations close to other stores in the network.
L.E.K. Consulting’s analysis of the recent store closure programmes announced by three major retailers, using a rich dataset of more than 75 descriptive and publicly available variables, suggests that the relationship between these factors has changed and also that new factors are now at play (see Figure 1 and below).
Click on the tabs and arrows below to review L.E.K.’s analysis of three different retailers’ store closure programmes. Interactive content is best viewed on a desktop. Data has been jittered to preserve anonymity.
While some significant variables are common to all three examples (e.g., rent), it is crucial to note that the key variables in each example are unique to that specific brand. Each retailer’s approach to right sizing their network therefore differs according to its individual brand proposition — a nuance that traditional analytical methods would miss.
Lessons for retailers
In this new world, structurally attractive catchments are fewer and farther between, and searching for them is rapidly becoming the wrong mission. Traditionally, catchment areas mattered because customers chose between local stores that competed for local demand — they simply didn’t have the same access to national or global brands. Now the story is more complex.
Most determinants of success are no longer specific to a local store or catchment, and a store’s business proposition is no longer defined by location — other factors such as brand, range, customer experience and price are growing in importance. Some old rules still apply, such as getting the right store in the right location, but retailers can no longer define the value of an individual store solely on the profit it generates within its catchment. The ‘halo effect’ — i.e. the role a physical store plays in promoting a brand and boosting its total system revenue through both physical and digital means — is critical.
Rather than focusing solely on the economics of individual branches within catchment areas when right sizing their networks, retailers should consider the role these stores play in their overall customer value proposition. Non-sales-based transactions taking place within a physical store, such as click and collect, item returns, and clothing trials, provide an additional value to customers that online shopping cannot; retailers must find a way to measure and recognise the effect these services have on the brand’s total system revenue and profit, alongside in-store sales.
Digital will continue to grow, expediting the need to switch from store to total system economics. If retailers are to survive, they must improve and differentiate their propositions, integrating physical and digital to provide customers with high-quality interactions across an increasingly non-linear customer experience.
Alibaba may offer a clue to the way forward. The Chinese online retailer has opened more than 60 stores, branded Freshippo (formerly Hema), which attempt to merge the online and physical retail experience by allowing customers to use an app to scan products, get information and pay. The stores also act as logistics hubs to enable a sub one-hour delivery to customers, regardless of whether the order is placed in-store or through the app. Another example is Amazon’s ‘4-star’ stores, a collection of physical stores selling an edited sample of products rated 4 stars and above online. Currently operating in five locations across the U.S., each store is curated to meet the taste of local consumers, reflecting the catchment area’s most popular products.
Six steps to better store networks
Running a store network at scale is both difficult and necessary, and L.E.K.’s analysis highlights the rapidly changing economics of store networks in the digital age. Now retailers must ensure they understand the new rules for evaluating openings and closures.
We recommend six steps.
- Identify your individual customers and rebuild your proposition and operating model around them, rather than around your stores. This approach will help you integrate the customer experience (discover, decide, review/share) into your business, and position you for growth.
- Decide on the role of the store for your business and accelerate trials of new formats such as showrooms and super-convenience stores. Get creative — for example, new stores to replace several, move to better locations, or sublet.
- Work out the appropriate size for your store portfolio, based on the economics of an integrated physical/digital proposition.
- Leverage external data, such as that used in L.E.K.’s analysis, when making decisions. Publicly available sources can be a valuable input for a number of planning situations, helping inform an understanding of historical competitor decision-making, predicting future competitor moves and assessing the status of competitor store networks.
- Align speed of transition — physical to digital — to customer (segment) appetite. Address the daunting transition from store-based economics to customer-based economics. Revenue growth is no longer driven by adding new physical stores, but by meeting the needs of more customers regardless of whether they buy through digital or physical means.
- Upgrade your data and analytics capability. Many retailers are still not making best use of their own and third-party data.
Achieving growth in the future
Given the irreversible digitalisation of the consumer journey, opening new stores will no longer drive growth for established retailers. Now is the time for retailers to soul search and analyse, as they plot their way towards the future. Rather than ask “Where should I open?” they should focus on optimising the overall customer experience and journey, before right-sizing their networks and working through where best to close. Those that do so will find themselves well positioned for growth in the years ahead.