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Zombie Retail Stores and Zombie Retail Departments

  
  
  

There's been quite a bit written over the past few months about retailers reducing inventories in the wake of the business downturn, and of assortments being cut back as well. I've written about the need to align inventories with sales, and that lower inventories also require narrower assortments. Across the retail landscape, this has been exactly what we've seen, with even more cutting likely to come in the back half of the year.  

As I've traveled stores in the last month or so, and particularly in the few couple of weeks as we start into the summer clearance season, I've been struck by the impact these reductions have actually had on stores themselves. Go into just about any discounter (Walmart included), category killer or other big box, and it's hard to overlook. Racks with only a couple of pieces on them. Shelving below display stock with only one unit, if that. Twelve inch peg hooks with only one or two units in front, and ten empty inches behind. Shelves that are bare, corners that look like time forgot, completely empty floor space as a result of racks and other fixtures having been pulled off.  

In stores ranging from 20,000 square feet right on up, empty space. And you can almost hear the question being asked in the corporate headquarters - if business doesn't bounce back, if this is this the new baseline, the ‘new normal', if we no longer need all that inventory, what are we going to do with all this space?  

What are we going to do with all this space?  

This recession has created zombie stores, stores that appear to be alive, but that are really dead. In good times, in every chain there are below average stores that only generate 70% or 80% of the average store, but are still four-wall profitable. In this downturn, with sales in some of these weaker stores off by as much as 10% to 20%, these stores are now four-wall cash drains.  

Every major retailer is pursuing every opportunity to renegotiate lease term, in some cases through cotenancy clauses, in an effort to lower four-wall breakeven points. Not every property, however, can successfully be renegotiated. What's left are zombie stores, space that can't pay for itself, and retailers aggressively seeking to reduce expenses even further in those stores to minimize the cash drain.  

But the issue doesn't end with zombie stores. The recession has also created zombie departments. In every store, there are departments that generate sales-per-square-foot that are only 60% to 70% of the store-wide average. In good times, if the cost-per-square-foot in these departments was fully loaded, they'd be marginal four-wall contributors at best. Now, they are also cash drains, and in many cases have been further paralyzed in their ability to generate sales by deep inventory reductions in both depth and breadth.  

And then there's the space throughout the stores where there used to be racks and fixtures, that now sits idle and isn't generating any revenue at all.  

Some retailers have been taking steps to address this issue, particularly Walmart and other discounters who were rapidly expanding grocery departments long before the recession began. Other retailers have increased ownership in unrelated, high-impulse items. But for many others still, the issue remains unresolved, without any obvious answers.  

If this in fact is the ‘new normal', it's a challenge that every retailer will face, from the smallest independent boutique to the largest big box chain. In my experience, we've never had stores look quite like they look now, and the challenge will only become greater as inventories are reduced further.  

What are we going to do with all this space?

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