The unintended consequences of brick-and-mortar's decline

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Lately, many big retail brands have been closing physical locations, in what has become known as the "retail apocalypse." Whether the stated reason is declining revenue, or concerns related to "shrinkage" and employee safety in some cities, the impact of store closure on consumers and their communities threatens to be seriously negative.

The financial spillover for the retailers themselves, though, may be an equally valid concern. Yet few observers ask questions such as, What happens to shoppers when stores close? What about sales? Are firms better off with their decisions to close shop?

Taotao Ye, assistant professor of marketing at the Donald G. Costello College of Business at George Mason University, addresses this glaring gap in the research literature in a research paper forthcoming in Marketing Science (co-authored by Venkatesh Shankar of Southern Methodist University).

The researchers obtained comprehensive online and offline transaction data for a major video game and electronics retailer, spanning July 2015-July 2017. "We have detailed records of every transaction" in addition to the locations of these transactions, Ye says.

Over the two-year period, the retailer closed more than two hundred stores, a figure representing more than 5% of its brick-and-mortar presence. The researchers analyzed the effects of each store closure at the per-county and per-customer levels.

The results were clear and startling. Net losses to the retailer well exceeded the average sales of the shuttered location. In other words, not only were brands totally failing to retain and redirect consumer activity to remaining locations or digital buying options, but they also suffered additional losses stemming from the fact of the closure itself.

Overall, the retailer experienced an average net monthly sales loss of approximately $209,317 for each shuttered location—or 18% of the average monthly per-county sales total.

Without extensive interaction with customers, it's impossible to know for sure why a single store closure could be so detrimental. But Ye speculates that it is about more than the inconvenience of having to drive to another location. Although the data shows that sales losses were greater in counties where stores were farther apart, Ye also found that customers with a preferred location close to home frequented that location less often (and made fewer purchases) following the closure of another, farther-away store from the same retail chain.

The shuttering of a store, then, seems to send a negative signal about the brand to consumers, who may start to transfer their loyalties to competitors that appear to be doing better. It may be a form of stability-seeking on the part of consumers.

Meanwhile, brands have generally not been effective at redirecting "orphaned" consumers toward e-commerce options. "The onboarding process is not easy for consumers. In store, they can get help from in-person employees, but online, they have to register everything, give out all their information and then navigate the website and mobile app," says Ye.

Ye's first piece of advice for retailers, based on this study, is to focus on making the pathway between in-person and online channels as smooth as possible for the customer. "They need to simplify their onboarding and get people into the online ecosystem and communicate more with customers to get them used to engaging with the brand through the app," Ye says. This would help with customer retention by decoupling brand loyalty from the presence of any one location.

Also, retailers can consider alternatives to store closure that may alter their brick-and-mortar footprint. For example, Ye mentions the trend toward small-format stores that has seen retailers such as Macy's, Nordstrom, Best Buy and IKEA opening more cost-effective and curated locations in suburban areas. Localized use of customer data would enable retailers to scale down while still meeting the needs of brick-and-mortar shoppers in the community.

"The main message from our research is that retail chains should thoroughly analyze the total impact of closing a store before making such a decision. Retailers can consider factors to mitigate these losses when analyzing which store to close.

"Mitigating factors might include short distance to another store location, a high percentage of in-store discounts in that county (an index of brand loyalty among price-sensitive customers), and low value of product returns (which implies less disruption to consumers visiting physical stores for returns and exchanges)," Ye says.

Journal information: Marketing Science

Provided by George Mason University