There is news in today's Economic times that Aditya Birla Retail MORE have closed 39 of their stores in Gujarat. This is one third of their stores in Gujarat. The reason was that the stores were not making money. Have a look at the complete article:
http://economictimes.indiatimes.com/articleshow/5748697.cms
Calculating the 'profit' from an individual store is difficult. How do you attribute costs of a delivery vehicle serving five stores in one locality. Closing one store is not going to reduce the logistics costs by 20%. Similarly the costs of the central buying team, and the CEO is not proportional to the number of stores. Thus, if the decision has been taken using traditional costing, I think it would be a blunder. It is incremental cost that matters here.
While costs are not proportional to the number of stores, unfortunately sales is. When stores are shut, sales will definitely go down in direct proportion. It is only the lease and the local manpower costs that would come down. The costs of expensive expat CEOs and the central organisation overheads would stay. Sometimes the drop in sales could be higher than the drop in store level variable costs and put the company in deeper problems.
Stores have been opened without detailed analysis based on some global ballpark figure. This was the first wrong step. Every retailer opened multiple formats. The second wrong step. Now, with cash crunch they are closing the stores recklessly, the third wrong step. My take: If a retail group is sinking, shutting a few shops is not going to help, yes the inevitable could be delayed a little.
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2 comments:
Interesting insights Sir.
But,according to retail we define the Loss Making Stores not just in terms of low revenue generating stores but also in terms of wrong format & size, Stores with high & unjustified rentals.
Presently,what most of the retail chains are doing are working on the right model like opening a convenience store format in a residential area rather than existing supermarket format(opening a format based on the need of that locality).
Closing the stores with higher lease rentals & opening the new stores with lower lease rentals in the nearby locality.
This can be seen if we check the no. of MORE stores opened recently.
What you have tried is to link the costs which I think comes in the picture as Fixed cost(CEO salary,transportation cost,Buyers/Merchandisers salary) and Variable cost(Employee salary of that particular cost).
But, according to me presently retailers are working on their past mistakes & making the retail model/back-end more economized & optimized which I think is commendable.
Plz do give your inputs.
Rgds,
Ashish
Very good analysis.
I think such businesses lose out because they strive to do too many things too fast. Every organisation doesnt have competency to do everything and be everywhere. It helps if the companies target a conservative rate of growth in the formative years and gives enough focus on buliding competencies, team and human resources; as they do on opening so many stores every month. Their attempts lead to a CEO resigning and another taking over and undoing things. No one gains thereby.
I think closing stores, temporarily, is a good strategy to cut costs and become profitable at the times of economic downturn. The same company may think about reopening the stores when things become better.
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