Excerpt from roundtable during Tango’s virtual retail summit The Next Normal for Retail Location Strategy on May 19, 2020.
Portfolio Assessment in a COVID-19 World
Pranav Tyagi – President & CEO, Tango:
“People have to start thinking about their portfolios not as a one-time plan, but across multiple time horizons. There’s a strategy for the immediate term and a different strategy for the long-term that people have to think about – let’s focus on the immediate time frame right now. Retailers have to be, and generally are in, what I would call it triage mode. This requires a rapid assessment of their store performance against what is the maximum potential in the trade areas that those stores exist in. And then depending on that analysis, we think stores should be bucketed into groups with unique strategies for each group. That would then dictate what actions they take, including permanently closing some stores, reopening timing for the stores they’re going to reopen, or renegotiating from a landlord perspective.
“One analysis we do for our customers is a quartile analysis that looks at stores across a couple of different dimensions and buckets them into four groups. If a store happens to be in the dog category, or poor sales and profitability in a trade area with low potential, those are candidates for permanent closure. If a store happens to be in a high potential area, but only performing like an average store, that type of strategy there, you would have to look to see why it’s performing below its potential? Is the rent too high? In which case we’d renegotiate the right rent strategy or we look at operations to see if there’s things we can do from an operational improvement perspective.
“The store performance side of the analysis, we believe should include several key metrics, not just your sales or cash flow. We should be looking at four-wall profitability like per square foot, other metrics like that. As retailers are assessing their portfolio, they should be digging into their leases to better understand the rights and obligations. People spend so much time negotiating leases and negotiating specific provisions. This is one of those times where some of those provisions might be there to your benefit, and that would help set individual store strategies and help set landlord negotiation tactics.
“Many retailers are doing this right now – JCPenney, for example, is closing 230-240 stores (about 30% of their portfolio); Nordstrom is closing 16 stores in nine states; Petco only paid 20% of their rent in April; Gap is not paying any rent in April; and restaurants like Chipotle, Chick-fil-A, and others not only paid full rent, but actually incurred additional overhead costs, potentially to send a message that they’re open for business.
“Everyone’s dealing with this differently. All of these moves, we are hoping are well thought out, although there’s some chaos out there. The bottom line is that all stores are not created equal, so when people start thinking of strategies for their store portfolio, it is not a purely financial analysis – it needs to be thought about strategically. Retailers need to develop what we would call informed store-specific strategies and then execute on them in a programmatic manner over time. And then over the long term, retailers need to also look at revised potential performance expectations for their stores over the next 12- to 24- to 36-month horizons. What happened in the last 12 months in performance before COVID is not a good predictor of the future, regardless of when we get an actual cure or when the vaccine is available.
“Generally, there’s going to be an impact on consumer confidence and there’s going to be a change in customer behavior, and then retailers have to account for that impact in their plans as they move forward.”
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