Overstored
How Retailers Can Retain a
Profitable Physical Store Network
in the Face of Growing Migration
to Digital Channels
Table of contents
Channel Migration and Overgrowth of
Selling Space Have Left Retailers Overstored
4
How Did We Get Here? Old Habits Die Hard
6
There’s No Going Back
9
What’s an Overstored Retailer to Do?
10
INSET: Rationalizing the Store Base: Not
Giving up, but Getting Smart
12
CASE STUDY: Tackling Channel Migration
Head On: The Toys’ R Us Story
13
The Last Word
14
2 | Overstored: How Retailers Can Retain a Profitable Physical Store Network in the Face of Growing Migration to Digital Channels
Caught between the
massive channel migration
to online and mobile
and the inertia created
by yesterday’s bricks and
mortar success, retailers
need to make tough
choices on the role of
physical selling space in
tomorrow’s world.
3
Channel Migration and
Overgrowth of Selling
Space Have Left
Retailers Overstored
Since the late 1990s e-commerce boom, analysts, investors, and
technology purists have been predicting the end of bricks-andmortar retail. And while the prediction of the bricks-and–mortar
format’s end has been greatly exaggerated, the fact is customers
continue migrating rapidly from physical stores to online and
mobile channels to fulfill their shopping needs (Figure 1)1.
Consequently, the online and mobile
channels, once merely a supplemental
revenue stream for traditional retailers,
are now a bona fide force that is wreaking
havoc on physical store sales productivity.
In fact, Accenture’s analysis of 29 top U.S.
retailers reveals that from 2005 to 2010,
total square footage and stores in operation
increased by 38 percent and 21 percent,
respectively, while sales per square foot
has actually declined 5 percent2. And
these less-productive stores are affecting
the bottom line. Return on invested
capital for the same set of retailers during
the same time period also declined 25
percent. Given these trends, the evidence
is clear that the majority of traditional
retailers today are overstored.
Figure 1. The evolution of customer buying behavior and its impact on retailers’ financials.
Rapidly declining foot traffic...
Retail Foot Traffic YOY % Decline
2008-2011
2008
2009
2010
2011
-0.6%
-1.1%
-3.3%
-3.8%
...combined with continued online growth...
Online vs. B&M Retail Sales Growth Rate
2005-2010
25%
24%
6%
20%
5%
15%
3%
4%
1%
6%
-2%
2005
Online
2006
2007
2008
B&M
4 | Overstored: How Retailers Can Retain a Profitable Physical Store Network in the Face of Growing Migration to Digital Channels
-8%
2009
2010
…is dramatically reducing store sales productivity…
Total Sq. Foot vs. Sales per Sq. Foot, US Retailer Index
2005-2010
Sales per square foot
3,458
$412
Total square footage
$392
2,497
2005
2006
2007
2008
2009
2010
...and in turn impacting financial performance.
Average ROIC—29 Top Retailers
2005 vs. 2010
10.39%
7.76%
2005
2010
5
How Did We Get Here?
Old Habits Die Hard
How did bricks-and-mortar retailers, and store productivity,
get here? Conventional wisdom is that a confluence of factors,
including technology innovation and consumers’ ability to shop
anywhere, anytime, led to this point. While this is true, it does
not fully explain why retailers have reacted slowly to correct
their course.
The more complete answer suggests
retailers suffer from a classic case of
overestimating (and overfunding) the
continued success of the store-dominant
model while underestimating (and
underfunding) the emergence of a new
model altogether.
In the past, the winning strategy for
retailers was real estate-centric and
simple to execute. Once retailers had a
format and formula customers wanted,
they “infilled” each local area with
large, experience-friendly stores that
conveniently capture customers near home
and work. This model worked well and
retailers were incented to see it continue,
given the cheap money and real estate
appreciation seen in the mid 2000s.
At the same time retailers were overestimating their “infill” strategy, they were
underestimating the growth of online
and mobile channels, how adding virtual
space decreases the need for new physical
space, and how online and mobile would
define retail relevance to consumers.
Underestimation by retailers took many
forms. Some retailers, such as Borders,
partnered with rivals such as Amazon
without fully realizing the decision’s
impact on their own online site. Others,
such as Blockbuster, were slow to adapt
to ecommerce altogether. All the while,
online-only retailers such as Amazon
and Netflix were finding ways to remove
traditional barriers to virtual purchasing
(especially payment security and exchange
or return hassles), thus shifting consumer
behavior and the competitive landscape in
the process. The result has been a gap in
talent, knowledge, and capabilities around
these new channels for some traditional
retailers and outright bankruptcy and
closure for others.
6 | Overstored: How Retailers Can Retain a Profitable Physical Store Network in the Face of Growing Migration to Digital Channels
7
There’s No Going Back
While it may be convenient for traditional retailers to take
a “wait and see” approach to the sustainability of channel
migration and its impact, it seems highly unlikely physical
selling space growth will make a big comeback.
Between 2011 and 2014, online sales are
expected to grow by 14 percent per year
(versus 3 percent for total retail sales),
while Web-influenced sales will increase
to 53 percent from an already high 48
percent today.3 Additionally, mobile
commerce sales are expected to grow
by a stunning 800 percent through 2015.4
These growth predictions do not seem
unreasonable when one also considers
that in 2011, venture capitalists more than
doubled their online retail investment to
a record $2.4billion versus the prior year.5
Beyond the raw data, however, the reality
is that online and mobile retailing is
a commerce phenomenon that is only
beginning to catch fire. Since 2000, the
percent of American adults with broadband
internet access at home has skyrocketed
from less than 5 percent to 62 percent, and
in 2011, 55 percent of all Americans made
purchases online. Additionally, the newest
generation of shoppers only knows a world
where they can buy in any channel. Ninetysix percent of American teenagers access
the Internet at least once a month
(compared with 74 percent of the remaining
population), and 43 percent of those teens
are already shopping online.6
The truth is, there is no going back. Channel
migration from stores to technology-driven
channels will continue, and the time for
traditional retailers to adapt and change
is now.
8 | Overstored: How Retailers Can Retain a Profitable Physical Store Network in the Face of Growing Migration to Digital Channels
9
What’s an Overstored
Retailer to Do?
Store-dominated retailers should address channel migration by
rethinking how they attract, serve, and retain customers, then
allocate capital and resources accordingly. Doing so is a three
step process that starts with assessing current vulnerability to
channel migration.
1. Assess the current store
model’s vulnerability
Channel migration is and will continue to
occur across most retail categories, but
the level and pace of migration will vary
(Figure 2)7.
For retailers to address channel migration
effectively, they should first assess their
migration vulnerability to understand how
dramatically it will impact their business.
This assessment addresses two key
dimensions: the type of products offered
and the profile of customers served.
Vulnerability for each of these dimensions
can be analyzed separately, and then
together, to develop a full picture for
each retailer’s business (Figure 3).
2. Be aggressive about
tactical options
Each retailer needs to address head-on
the underlying causes of vulnerability.
For those retailers that are particularly
vulnerable, the plan should be aggressive,
swift and consider all potential options.
Retailers with low vulnerability, on the
other hand, should monitor migration
closely and look for opportunities to
get ahead of both traditional and
online competitors.
Figure 2. Online penetration by retail category as of January 2012
34.2%
28.8%
19.0%
13.9%
Office
Supply
Books &
Music,
Magazines Movies &
Videos
Toys &
Hobbies
13.9%
10.3%
9.9%
Computer Consumer Flowers,
Software Electronics Greeting,
Gifts
9.3%
Home &
Garden
7.8%
6.2%
5.8%
Jewlery & Sports &
Watches Fitness
Other
4.8%
3.2%
Apparel & Furniture Consumer
Accessories Appliances Packaged
Goods
Figure 3. Assessing store model vulnerability
Product vulnerability
Customer vulnerability
Store model vulnerability
Easily comparable/commodity
Younger
Product
vulnerability
Non-exclusive
Higher educated
H
“Digitizable”
Not time sensitive or replenishmentoriented
Low service requirement
+
Higher income
Extreme
=
Price sensitive
Moderate
Tech savvy
Less social
L
10 | Overstored: How Retailers Can Retain a Profitable Physical Store Network in the Face of Growing Migration to Digital Channels
Low
L
2.0%
H
Customer
vulnerability
While each retailer will vary in how they
choose to move forward, there are three
tactical options that can be applied to
almost any retailer:
Real estate: renegotiate,
reformat, rationalize.
Based on the level of channel migration,
most retailers should take methodical
action with their store base. The first
place to look is lease renegotiation. While
US rental rates have already declined 13
percent from their peak in 2010, according
to the National Association of Realtors,
retailers should continue to have the upper
hand on rental rates, especially on lower
quality properties. Additionally, retailers
should be bold about reformatting and
rationalizing their store base. In a recent
Accenture Survey for The Retail Industry
Leaders Association (RILA), 60 percent of
retail executives believed the number of
stores will decrease by 2020 and 90 percent
believed that formats will be smaller or
fundamentally different in that same
timeframe. And while there are typically
emotional hurdles that retailers must
address when considering reformatting
and rationalizing, it’s important to note
that it does not and should not be about
“slash and burn” or acknowledging
defeat on growth. Instead, savvy retailers
understand that it’s a positive pivot toward
the future. They are smart about how
they proceed, using advanced analytics
to asses who will continue to shop their
stores, what their needs are, and how
they can most effectively address those
needs with their current locations, types
of products carried, level of service
offered, or the actual physical formats
(see inset on page 12 for more details).
Customer: create channel equivalence.
Vulnerable retailers need to determine the
best way to attract and retain customers
in all channels, which means developing
channel equivalence to ensure a consistent
brand and customer experience. For most
retailers, the starting point is to invest in
and develop an online and mobile presence
that compares well against competitors, yet
also integrates with their in-store experience.
For example, out of stock items should still
be available to customers through a mobile
POS with the ability to be shipped to their
home. Conversely, if that same customer
buys an item online and wants to return
it, they should be able to take it back to
the store and exchange it for a different
item, if necessary. Retailers who can offer
their customers the flexibility to start and
end their shopping experience in any and
all channels, and move back and forth
effortlessly, can offer a level of convenience
and service that pure online retailers do
not have the infrastructure to match.
Merchandising: think exclusive and local.
A key method for addressing migration,
particularly for products that are easily
comparable or simple to understand,
is to develop exclusive offerings that
competitors, online or otherwise, cannot
match. These offerings can be internally
developed (i.e. private label) or designed
in partnership with key suppliers.
Additionally, retailers can have a more
tailored in-store assortment that connects
to the surrounding community. For
example, retailers can invest or carry local
merchant’s goods as a means to create
a unique kinship to the physical space
in a way online-only retailers cannot
match. In either case, the goal should be
to meet and exceed customer needs while
generating positive buzz for the brand.
3. Pivot corporate headquarters
and its resources to future
growth channels
With future retail growth continuing to
accelerate in non-store channels, the
final step requires C-level pivoting of
corporate headquarters accordingly. This
means addressing organization structure
and capital and resource allocation.
Retailers might do this by instituting an
EVP-level lead of Channels reporting to the
CEO, with cross-channel responsibility for
stores, online, mobile, and call center. This
unified channel structure enables a single
executive to have positional authority to
make difficult cross-channel decisions and
reduce complications in integrating the
customer experience.
For example, Walmart has stated its
intent to integrate the Merchandising
and Operations capabilities of the online
organization with those of its traditional
retail business.8
Further, recent statements from Walmart
leadership indicate exactly how this is
integration is happening. President and
CEO of Walmart US Bill Simon stated,
“We are now moving toward a strategy
called continuous channel shopping,”
while President and CEO of Walmart.
com Joel Anderson commented, “Our
store teams next year will get sales credit
for both store sales and .com sales.”9
Beyond organization structure changes,
growth channels and their projects should
be at the forefront of resource and capital
allocation. Simply stated, the proof that
retailers are embracing the impact of
multichannel’s growth is demonstrated
by project staffing and funding. If a
retailer is fully committed to non-store
channels as the future growth engine, those
channels will receive the best talent and
outsized funding relative to their current
contribution to the P&L. This demonstrates
the retailer is not only aware of the rapid
shift in consumer buying preferences, but
also is willing to support this reality in
action and deed.
From an organizational structure
perspective, online and mobile channels
should be raised to the same level
as stores, giving them equal decision
input on inventory allocation, pricing,
marketing, labor, and most importantly,
execution of the customer experience.
11
INSET
Rationalizing the Store Base:
Not Giving up, but Getting Smart
Most traditional retailers are going
to be moderately or extremely
vulnerable to channel migration
and will likely need to rationalize
their store footprint to optimally
serve customers in all channels and
maintain a requisite ROI. While it
may seem logical to simply close
the poorest-performing stores based
on sales and profitability trends,
doing so will likely not produce
desired results. In fact, store
rationalization should focus on
determining how successful each
store is likely to perform in the
future, leveraging the same level
of thought and analytics used
when retailers open stores.
The starting point for retailers is to perform
a comprehensive analysis on the current
store portfolio, leveraging both quantitative
and qualitative assessments, to identify
format modification or rationalization
opportunities. Quantitative analysis should
focus on predictive modeling—using
chain-wide store-level data to determine
the internal (store age, distance to other
stores, etc.) and external (local share,
competitive density) factors that are
drivers of store success for each type of
format. With the factors defined, retailers
can analyze each store in the network to
determine if it is likely to be financially
viable in the future. Accenture believes
that this store-level analysis should be
done on a market-by-market basis, as
opposed to chain level, in order to ensure
adequate competitive positioning and scale
in the key geographic areas in which the
retailer competes. Once the quantitative
analysis is complete, a set of qualitative
filters should be considered in order to
ensure rationalization decisions are not in
conflict with other strategic considerations.
These strategic considerations can include
regulatory stipulations, the role of certain
stores (i.e. showcase store) in a market or
chain, and likely competitor response.
Once market and store-level rationalization
targets are identified, a retailer should plan
and execute changes or closings carefully,
while considering and managing key
stakeholder issues:
• Customer Retention—Communicating
and incentivizing migration to
a sister store or channel
• Talent Retention and Morale—Retaining
top talent while supporting employees
who are leaving as part of the transition
• Marketplace Communication—Delivering
a clear message on why changes are
being made and why addressing the
overstored position means the retailer
is getting smart, not giving up
Group of Stores (Market)
Internal Factors
•
•
•
•
External Factors
Financial Performance
Store Age
Store Proximity
Management Quality
•
•
•
•
Competitive Intensity
Market Growth
Customer Demographics
Local Share
Store & Market Level
Analysis
Strategic
Considerations
Store Rationalization Decisions
12 | Overstored: How Retailers Can Retain a Profitable Physical Store Network in the Face of Growing Migration to Digital Channels
CASE STUDY
Tackling Channel Migration Head On:
The Toys’ R Us Story
Amidst the many big-box retailers
that have faltered in the race to
compete against their more agile
competitors, Toys “R” Us stands out
as an early success story. Through
the mid-1990s, Toys ”R” Us built
a dominant 25 percent share of
the US toy market served by a
massive store footprint consisting
of Toys “R” Us, Babies “R” Us and
Kids “R” Us outlets (peaking at
1,053 US stores in 2001). In the
late 1990’s, Toys “R” Us began a
fall from dominance as low-cost
competitors such as Wal-Mart
and Target, and eventually Amazon,
aggressively targeted the toy
market. As a result, Toys “R” Us
saw earnings decline and actually
reported an operating loss in 2005,
causing many analysts to predict
the end of big-box toy retailing.
While most big-box retailers defaulted to
store expansion to grow revenues, Toys “R”
Us ran in the other direction. It closed 10
percent (87) of its stores in 2006 and reduced
overall square footage by 3.3 million.11
Despite reducing its footprint, Toys “R” Us
actually grew revenue and dramatically
increased profitability, due to its crosschannel capabilities and competitive tactics
(see charts).
Toys “R” Us Financial Results
2003-2010
Revenue ($B)
16
14
0.8
12
Revenue
Operating Income
Turnaround begins
0.6
10
0.4
8
6
0.2
4
0.0
2
0
In 2005, Bain Capital and Vornado recognized
a turnaround opportunity and took Toys ”R”
Us private. As many retailers are now learning
in 2012, Toys “R” Us had to critically evaluate
how it could differentiate its channels and
customer experience from competitors in the
eyes of its customers. Toys “R” Us improved
the customer experience with access to
exclusive toys and trends (via exclusive
contracts and co-created products) and
broadened its toy assortment across channels,
shifting toward more online retailing
(acquiring toy websites such as eToys.com
and babyuniverse.com) to pull customers
away from competitors that offered low
prices on a much smaller selection of toys
(Walmart).10
Operating
Income ($B)
1.0
2003 2004 2005 2006 2007 2008 2009 2010
-0.2
Toys “R” Us Store Count
2003-2010
Number of stores
Domestic
International
574
601
641
678
715
713
717
744
927
898
901
837
845
846
849
868
2003
2004
2005
2006
2007
2008
2009
2010
Turnaround begins
13
The Last Word
Customers are in the process of migrating away from stores, and
this is a trend that is accelerating. For traditional retailers, the
time to address migration is now, as those who don’t will be left
with high store counts and large amounts of square footage, but
few shoppers and minimal profits. To tackle migration, retailers
need to assess their vulnerability, look to smaller and fewer stores,
and shift capital and resources to equally support tomorrow’s
multichannel growth. The journey will not be easy, but those
that can do so successfully will continue to be competitive in a
more channel equivalent world.
14 | Overstored: How Retailers Can Retain a Profitable Physical Store Network in the Face of Growing Migration to Digital Channels
For more information contact:
Christopher Donnelly
christopher.donnelly@accenture.com
Peter Madden
peter.k.madden@accenture.com
David Forsythe
david.h.forsythe@accenture.com
Katherine Smith, an Accenture Products
consultant also contributed to this article.
References
US retailer index
1 ShopperTrak, “Foot Traffic Trends,”
November 7, 2011
Walmart, Kroger, Target, Walgreens,
The Home Depot, Costco, CVS
Caremark, Lowe’s, Best Buy, Sears
Holdings, Safeway, SUPERVALU,
Rite Aid, Publix, Macy’s, Ahold USA/
Royal Ahold, Kohl’s, J.C. Penney,
TJX, Meijer, True Value, Dollar
General, Gap, BJ’S Wholesale Club,
Nordstrom, Staples, Ace Hardware,
Toys “R” Us, Bed Bath & Beyond
2 Accenture analysis and SEC filings (Annual
(10-K) and Quarterly (10-Q) filings) 19952010 for the following: Walmart, Target,
Walgreens, The Home Depot, Costco, CVS
Caremark, Lowe’s, Best Buy, Sears Holdings,
SUPERVALU, Rite Aid, Publix, Macy’s, Kohl’s,
J.C. Penney, TJX, True Value, Dollar General,
Gap, BJ’s Wholesale Club, Nordstrom,
Staples, Ace Hardware, Toys “R” Us,
Bed, Bath & Beyond
NOTE: Ahold USA/Royal Ahold and Meijer data was
excluded for these two privately held companies
3 Euromonitor International, January 2011;
Forrester Research: Web-Influenced Retail
Sales Forecast, December 2009
4 Barclays Capital, “U.S. Internet: Internet
Trends & Picks for the Year Ahead,”
January 11, 2011
5 Thomson Reuters, December 9, 2011,
http://www.reuters.com/article/2011/12/09/
us-venture-retail-idUSTRE7B722L20111209
6 Pew Research Center, 2010
7 Comscore, November 9, 2011,
www.comscore.com/Press_Events/
Press_Releases/2011/11/comScore_
Reports_36.3_Billion_in_Q3_2011_U.S._
Retail_E-Commerce_Spending_Up_13_
Percent_vs._Year_Ago; US Census Bureau,
November 17, 2011 - Retail Indicators Branch
8 Walmart press release, January 28, 2010
9 Nicholas, Leon “Continuous Selling at
Walmart,” Kantar Retail research and Kantar
Retail analytics, April 2012
10 Rosemboom, Stephanie. “Toys “R” Us
Makes Deal for F.A.O. Schwarz,” New York
Times, May 27, 2009
11 Toys “R” Us 10-K (2003-2010), Los
Angeles Times (Jan. 2006), Associated
Press, January 2006
15
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