Sales Up – Profit Down – Let’s Close Stores

In yet another announcement of a major retailer shuttering the doors of a handful of stores to compensate for a mysterious loss of profit, we are reminded that Bottom Line Matters.

I don’t like to point fingers when a retailer closes stores. I have worked in retail all of my life and this headline means one thing to me – employees are out of work.

But it is unfortunate because it is usually avoidable.

Here’s how it goes.

In a quest to gain market share, the retailer loses sight of the operating principles that took them to where they are. Now they feel they can gamble a little. “Besides”, they think, “some of these rules prohibit growth, they are not loss prevention, they are sales prevention. Let’s eliminate the restrictive things and focus on growing our store count so the other guy doesn’t eat our lunch”.

And so it goes, little by little, some of those basic rules that set the foundation for the company are taken out.

And then sales go up, and profit declines, until one day an announcement goes out that the company has had to contend with a challenging environment and needs to look in the mirror and shave expenses that have grown uncontrollably. What better way than to eliminate the operating expenses of a half to a dozen stores?

Here’s the bottom line.

Any initiative that is introduced into the business must be accompanied by a corresponding return on investment analysis. And if you are already operating efficiently (meaning lean, with no fat to trim), then to fund the new business internally is a showstopper.

A business that wants to grow should save first so they can spend safely. To spend first and then cut expenses forces your hand to act irrationally.

I am reminded of an experience whereby the CEO of a retailer I worked for, made a statement that 3 additional stores would be built ahead of schedule. BUT, he also said this was made possible by the reduction of shrinkage in the prior year. The savings paved the way (and paid the way!) for the growth initiative.

Had it been the other way around. The decision would have been made and then the savings would have been mandated by eliminating something deemed redundant or unnecessary. The company could have looked at loss prevention and said they didn’t need as much. Then the shrink savings wouldn’t have been enjoyed, and the company would have been in the same boat as the one that as I write this are in the headlines stating they have just decided to close 10 stores because profit declined on a sales growth of 7%.

How does that math work I ask?

I say “save so you can spend, and if you don’t save you can’t spend”. Ask a former employee of one of the retailers in the history books if they agree. They’ll give you an honest answer.