By Steve Montgomery
The following article was written by retail operations expert Steve Montgomery of b2b Solutions. Steve presented at Focus on Finance 2001 and can be reached at 847-295-2418.
Not all locations are equal. If you operate more than one store, it is certain that some will out perform others. As long as all your stores produce acceptable levels of return, it is easy to accept variances, but, what do you do when some fall out of the acceptable range? Now you have to determine the answer to the “Ann Landers” question – Are you better off with them or without them? The answer is far more complex than the question.
Start by determining why these units are not providing the needed returns. Determining that answer will provide you with some indication of what you should do with the sites. Is it a revenue, margin or cost issue (or in some cases, all three)? Are revenues and/or margins lower than your other units? If so, is it due to gasoline, c-store, or both? The same question applies to costs.
Pinpoint when these units started under performing. Is it something new or somethingthat you chose to ignore for some time? If these units failed to measure up from day one, it might indicate a site selection issue. If so, it may be well worth the price to have an operational assessment done to determine as built site potential. Sites that always under performed are hard to fix and are likely candidates for sale.
Alternatively, it might be a personnel issue. Did the problems start when you replaced someone at your headquarters, the area supervisor or the store manager? Did any of your key personnel have a lifestyle change? If the answer is yes to any of these questions, then the decision might be to keep the store and change the people.
Another underlying issue might be marketing. Did a new competitor open? Did you re-brand? Has your approach to marketing key categories changed? Has the surrounding area been undergoing demographic changes that you have not responded to? Have you been repositioned in the consumer’s mind by a new competitor? If the answer is yes to any or all of these, then the problem may be fixable, and the stores should be considered potential keepers. Once you have these answers, begin to evaluate your options.
Sell: Selling the sites may be the easiest choice, but perhaps not the right one. There is more involved than just the opportunity to redeploy capital. What will your organization look like if you did decide to sell the under performing sites? Would you need the same staff? If so, what would your new G&A cost per unit be? Would the decrease in size impact your relationships with vendors? Do you have contracts that require you achieve certain volumes to maintain your pricing or obtain certain rebates?
If you do decide to sell them, the issue is how to maximize the price/cost ratio. All sellers should begin the sale process by thinking like a buyer – that is, what would make their business more attractive to purchase? Part of the answer is determining who the likely buyer is. Do you know what drives their decision process?
It can take some time to position sites for sale, but the financial impact of doing so is well worth the effort. A minimal investment in paint, etc. may significantly improve the look of your locations, add eye appeal for the buyer, and add to the price. At minimum, ensure the sites are clean and well stocked.
Keep: If your decision is to keep (or maybe keep) the sites, develop a plan to best address the underlying issue(s). Let’s assume you have a strategy and a marketing plan that have been implemented and are working at other locations. Let’s also assume you have some time in which to take action (i.e., the sites are not hemorrhaging money).
It may seem self evident that the reason these sites are under performing is because you are not meeting the needs of your current customers, but do you know why? Answer the following questions: Do you know who your current customers are? Where they come from? Why they choose to shop at your site? Do you know what they like, and don’t like, about these sites? If the answer is no, begin with some consumer research that includes your existing customers and those who are not shopping at your locations.
In addition, conduct an assessment that goes deeper than comparing the revenues, margins and cost of these sites versus your others. Is the marketing as sharp? Does a new competitor make these stores look dull by comparison? Is the problem only skin deep (what paint and minimal capital can fix)? Outline what options you might employ and try them at one site and see if it works. If it does, replicate at your other sites. If not, determine other alternatives you might try.
Once you have identified the underlying issues, do you have what is necessary to fix it? If not, how do you intend to get the necessary skills? Do you want to rent the expertise or acquire it? The answer often lies in the economics – many times it is less expensive to pay more for short-term expertise to develop the plans, analyze the needs, etc. than to acquire these skills on a more permanent basis.
Final Note: While the process of evaluating and addressing lower performing stores is an issue for every retailer, it is far better to make this an ongoing process than to wait until it is a crisis situation. Conduct benchmarking and operational assessments at least yearly and “discover” your potential problems early. They will be much easier to fix the sooner you find them.