Three signs that it's time to close the retail outlet

This year will be a test of strength for shoe retailers, - all market participants say this.

Many companies, not only in Russia, but also in other countries, in particular in the USA, are revising their strategy under the influence of the economic crisis. One of the most popular tactics that allows an enterprise to stay afloat is optimization of its retail network.

American Citi Research analyst Paul Lejez believes that in the current situation, when consumer behavior is changing, and shoppers are increasingly buying goods online, many retail players have too wide retail chains.

In his report, Paul Lezhez cites several reasons for retailers to think about the need to reduce their retail sales.

The first reason is the lack of profit. We often hear that the management does not close the retail outlet when the cash flow is interrupted or in the case of a slightly positive cash flow. But a retailer would not open a store just to cover their expenses, so why would he leave a store open in the same situation? - asks Lezhez.

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It may be difficult for the retailer to part with the store from an emotional point of view, this situation is especially typical for small companies, or when it comes to closing flagship stores. Sometimes management still hopes for something or feels remorse over having to lay off a large number of employees. Nevertheless, analysts warn that the work of the store requires working capital, they must generate return on invested capital - "break-even is not a reason to keep the store open."

The second reason is the growth in the number of stock balances. In 2016, a major problem for brands and retailers is the rise in inventory stocks as a result of an unusually warm winter. Many companies, trying to get rid of the product, were forced to carry out large-scale promotions, which provoked a decrease in business margins. Large inventory leftovers are another reason to think about whether to keep the store running, says Lejez.

“If you are thinking about whether to close a retail outlet, it makes sense to pay attention to the working capital / commodity ratio. After all, if there were no store, the money could have been directed to other purposes, ”the expert says. If a company has multiple stores that do not meet a certain cash flow, the business must account for the millions of dollars in inventory that would be freed from closing unprofitable retail outlets. In addition, experts note that high rental rates were another reason for the recent bankruptcies of retailers in the United States. In such a situation, leaving the store working, just to keep it, means taking on a heavy burden.