Retail rationalization is not such a bad thing

Drug Store News,  May 20, 2002  by Mark Tosh

• E-mail
• Print
• Link

The old joke in retail is that there are never too many stores, just too few customers. With the economy down and unemployment up, however, that joke just doesn't get quite the same hearty response these days.

Several retailers over the past few quarters have come to the conclusion that, yes, there are too many stores--at least in certain markets--and they have begun taking steps toward rationalizing their store bases. To paraphrase that retail doyenne Martha Stewart, this is not a bad thing.

Indeed, the rationalization of retail square footage can be seen as a positive development for a sector that's much in need of a lift right now. Excess capacity has been the bane of the industry in some markets, and reallocating that space should only help shore up performance among the remaining players.

The latest examples of this rationalization come from the supermarket channel. Winn-Dixie reported May 6 that it has decided to break up and sell its 71 stores in Texas and another five in Oklahoma, news that came less than one week after Albertson's reported its plan to sell 12 Seessel's stores in the Memphis, Tenn., area to Schnuck Markets.

While neither of these deals is intended to take retail square footage out of the marketplace--though that likely will happen--the end result for both the sellers and the chains remaining in these markets should be positive. Winn-Dixie reportedly was losing $30 million in Texas and Oklahoma, so the net result of the divestiture should add a boost to the chain's bottom line. Albertson's, too, has been on a mission to divest underperforming stores and, over the past several months, has announced plans to exit Houston, San Antonio, Nashville, Tenn., Miami and portions of Missouri, or a combined divestiture of a total of 165 stores across its 2,500-unit store base.

The most significant retail rationalization under way right now is happening at Kmart. The discount chain is closing 283 stores across the United States, a move that definitely will take retail space out of the marketplace. Whether this rigorous reduction is enough for Kmart remains to be seen, but competing retailers in nearby locations have to be feeling a bit better following this rationalization.

Drug stores, too, are taking a closer look at store productivity and ROIs and finding that perhaps they don't need to have a presence in every nook-and-cranny-type regional market. Rite Aid finished its fiscal year in March with 151 fewer stores, while Eckerd's store count was down by seven units. CVS is in the midst of closing 225-plus underperforming stores and likely will end 2002 with fewer stores than it began the year.

A few of the top regional drug chains also have made a few cuts to the store-count line, including Kerr Drug and Familymeds, with Familymeds exiting the California market last year.

At the same time, many retailers are budgeting cautiously for new-store growth in 2002. Rite Aid, which found itself in dire straits after opening more than 1,100 new and relocated stores between 1997 and 1999, reported in a filing this month with the Securities and Exchange Commission that it intends to spend roughly $130 million on capital expenditures in the year ending in March 1, 2003, about one-quarter less than in its past fiscal year. The budget covers the opening of three new stores, 18 relocations and 140 remodels. Instead of spending heavily on new stores, Rite Aid is focused on making its existing units more productive--a noble goal for any retailer--and has stepped up its effort to buy pharmacy files from other drug chains an independents.

In one of the more innovative rationalization moves recently, Rite Aid and CVS exchanged stores and pharmacy files from stores in a number of Ohio and Michigan markets. After the dust settled, Rite Aid had strengthened its position in Canton and Toledo, Ohio, and Flint and Saginaw, Mich., by purchasing several stores and files from CVS. Thirteen CVS stores were affected by this deal in Toledo alone. At the same time, CVS acquired stores and pharmacy files from Rite Aid in Cincinnati, Hamilton and Columbus, Ohio. Rite Aid no longer operates in those three markets.

And these kinds of deals are likely to become more commonplace in the years ahead as retailers seek to firm up their operating bases. Balancing store count against ROI may indicate a need for fewer stores. This could be a good thing.

COPYRIGHT 2002 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.
COPYRIGHT 2008 Gale, Cengage Learning