Influential causes of retail failure

  • News
  • May 25, 2017
  • The Register team
Influential causes of retail failure

Stories about retailers shutting down or selling are becoming increasingly more common in the news. So, what are the primary causes of retail failure?

Postie, Dick Smith, Wild Pair and Pumpkin Patch, are familiar names that have been sold in the last 18 months due to struggling stores.

Among those to be bought out also includes United, Pie Face, Myer, David Lawrence, and Marcs.

Conor McElhinney, partner at McGrathNicol, speaking at the Restructuring Insolvency & Turnaround Association New Zealand (RITANZ) 2017 conference, says not getting the basics of retail right can be a prime example of why stores fail.

“One of the key metrics in a brick and mortar retailer is same-store sales, but retailers are not publicly reporting this.  Nearly 70 retailers reported same-store sales on a monthly basis in 2005, according to Thomson Reuters.”

“That number has since dwindled to only six companies and Thomson Reuters announced in March that it will, therefore, end its monthly same-store sales index,” says McElhinney.

McElhinney says retailers need to monitor their key metrics, from like for like sales, employee sales, and conversion rates among others.

McElhinney uses Pumpkin Patch, Dick Smith and Kathmandu as examples of why retail stores fail, or in Kathmandu’s case, why they survive.

According to the above chart, there are 10 factors that result in a struggling brand. From Omni-channel offering to external factors.

McElhinney explains that for Pumpkin Patch Between FY07 and FY16 P its same-store sales declined by over 50 percent. But continued paying out investors dividends when losing money, as it was funded by debt.

According to the graph, Pumpkin Patch had a lot of factors against it. From a lack of reinvestment to unprofitable stores, the store was bought out by Australian ecommerce Catch Group and now operates solely as an online store.

McElhinney used Dick Smith as an explain of a brick and mortar store that had reinvestment but expansion funded by debt. 

“Declining same-store sales masked financial results due to “new revenue” from new stores and growth in non-core business.”

“The worst part was it buying stock for rebates, not because it was what customers wanted. This resulted in $180m of inactive stock (56 percent of total inventory) that required a $60m write-down December 15.”

According to Bloomberg, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months. A staggering 80 percent crash and burn.

There are many factors which influence in the failure of a retail store. Ultimately a primary reason is that they run out of cash, and therefore stop profiting. But cracks in the foundation of a business can appear long before a day of financial collapse.

There are five additional reasons which have been linked back to the failure of retail businesses, according to University of California study, Gentrification, Displacement and the Role of Public Investment: A Literature Review (2015).

1) Out of touch with customer dialogue: The study states in reference to The Cluetrain Manifesto novel that Markets are Conversations; listen.

2) No real differentiation in the market, or lack of unique value propositions.

3) Failure to communicate value propositions in clear, concise and compelling fashion.

4) Leadership breakdown at the top (yes -- founder dysfunction).

5) Inability to nail a profitable business model with proven revenue streams.

McElhinney also used Kathmandu as an example of a struggle retail chain who managed to save its brand.

“It was using the online store as a clearance outlet, due to supply chain issues to clear excess 2014 stock – now it’s doing omnichannel, online sales grew by 50 percent to catch up to the industry average of 7 percent online.”

Kathmandu closed several of its UK stores and is now planning a capital light expansion through online and wholesales.

The share price for the company increased over 50 percent from $1.30 (Apr-15 to Jun-16) to over $2 today, sales increasing (22 percent since FY12), profit increasing ($20m FY15 to $34m Jan-17).

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