All the Right Moves
Oct 1, 2008 12:00 PM, By Elaine Misonzhnik
Correction: Gap has not posted losses for 15 straight quarters. It has posted five straight quarters of profits. It has posted 15 quarters of same-store sales declines. Further, while sources did mention Gap as a bankruptcy candidate, company officials pointed out it has $1.7 billion in cash on hand and says it is not considering bankruptcy.
Apparel giant Gap Inc.'s decision this summer to close some stores and downsize others was no surprise to retail analysts. After all, San Francisco-based Gap has reported losses for 15 straight quarters and is frequently mentioned as a possible bankruptcy candidate. Most industry observers attribute the chain's decline to poor merchandising decisions and the departure of retail legend and former president and COO Mickey Drexler in May 2002.
But it turns out Gap's decline was not solely due to poorly thought-out inventory choices. During the company's second quarter conference call on Aug. 21, chairman and CEO Glenn Murphy dropped the bombshell that for all these years, the retailer was not employing a coherent plan for its 3,100-store fleet.
“We've never had a clear real estate strategy,” Murphy, who was appointed to his post in July 2007, told analysts. “That was one of the first observations that was made when new management came in.”
Considering how many resources retail chains have at their disposal today to help them make smart real estate decisions, Murphy's admission seems to defy all logic. After all, Gap employs an extensive real estate department. Furthermore, there is no shortage of leasing experts, consultants and site selection specialists in the marketplace who are ready to offer their services to expanding chains. The problem is that most retailers, especially publicly traded firms, are under enormous pressure to expand and gain market share. That “grow at all costs” mentality leads to sloppy homework. It also means that Gap's story is not unique, says James C. Bieri, president and CEO of the Bieri Co., a Detroit, Mich.-based retail real estate consulting firm.
Bieri points to another ubiquitous chain — Starbucks Inc. — as an example of an expansion campaign gone haywire. In its heyday, Starbucks gained fame for its targeted real estate strategy. When considering opening new stores, it would look not only at income levels and traffic counts in a given location, but at the education levels of its potential customers and the availability of easy exits off the highway, among other factors. But in its efforts to become the No. 1 coffee seller in the country, the chain became too lax about cannibalization possibilities, opening new stores around the corner from old ones and going into markets where the demographics did not fit its core customer base. As a result, the chain is now being forced to close 600 underperforming stores stateside.
Seattle-based Starbucks declined to comment for this article, but the chain's spokesperson said the retailer takes into account demographic information, Starbucks' human and financial resources and level of coffee knowledge in an area when opening new stores.
At the same time, some retailers consistently get it right. Specialists point to the Container Store, Costco and Sephora, among others, as firms that employ intelligent growth strategies and have resisted expanding recklessly. What do these chains have in common? To begin with, those firms employ a clearly defined, uniformly enforced real estate strategy, says Eileen F. Mitchell, executive vice president with RCS Real Estate Advisors, a New York City-based retail real estate consulting firm. These companies understand who their core customers are, where they live and where they do their shopping, notes Mitchell.
They also try to avoid another pitfall of rapid expansion. Retailers need to be careful about figuring out the economics of their expansion plans, says Ted Parris, senior vice president for retail with Grubb & Ellis, a Santa Ana, Calif.-based commercial real estate services firm. New stores have to make sense on the balance sheet before they make sense as brick-and-mortar locations.
Finally, measured expansion is key, according to Bieri — after all, 10 under-performing stores will result in much smaller losses than 100 or 1,000.
Where are you going?
Fortunately, most chain retailers understand that every new lease constitutes a potential liability and could be the cause of the company's undoing, says Howard Davidowitz, chairman of Davidowitz & Associates, Inc., a New York City-based retail consulting and investment banking firm. The concept most firms start with when considering new locations is an attempt to replicate a chain's best-performing stores. To do that, retailers first have to know who their core customers are and where they reside. A lack of attention to its core customer base might have been a reason for the demise of discount apparel seller Steve & Barry's, which filed for bankruptcy in July. According to a report from Retail Traffic's sister publication Multichannel Merchant, when Steve & Barry's set about collecting addresses from its customers for e-mail alerts, it neglected to ask them about their age, sex and income levels — something that should have seemed like Marketing 101 to any modern retailer. Instead, the chain, which grew to 276 stores over the past 28 years, went after the generous tenant allowances it was being offered by landlords with distressed properties. “They did not choose locations based on their ability to do business,” says Bieri. “Their main goal was to get cash into their coffers.”
