Store Closures Can Hurt More Than Help Retailers’ Bottom Line

Furniture World News Desk on 2/13/2024

Everybody knows that opening a store in a new location can have a positive impact on sales not just in that location but in online traffic overall. It’s the “Halo Effect.” But closing a store can result in more than just lost sales in that particular store. That’s called the “Horn Effect,” the negative flip side of the halo effect.

Based on a new study from ICSC measuring both the halo and horn effects, the devil beats the angels. Store closures have a greater negative impact on online sales than opening a store has in driving more online traffic.

Store Opening And Closing Calculus

Measuring the halo effect, the ICSC found that after opening a store, online sales increase by an average of 7% over the next 13-weeks in the trading area. Even greater benefits accrue to emerging retailers. Their online sales are boosted 14%, which explains the rush for digitally-native brands to open brick-and-mortar locations.

“From our previous studies, we knew opening or closing a store impacted online traffic, but with this new study, we got more granular using credit card data,” said Stephanie Cegielski, ICSC’s vice president of research and public relations. “Retailers assume that people are going to go to the online site to make purchases after a store closes, but they often don’t.”

Deciding to close a store is usually a simple process. Retailers have real location-specific sales data to rely upon and it’s usually pretty easy to see when the costs of operating a store are greater than what it contributes in sales and profits.

But here’s some math that needs to be added to the calculation: After closing a store, retailers lose nearly 12% in online sales in the local trading area, almost double the online business gained when opening a store.

And depending on the type of retail store, the online losses can be significantly higher. For example, fashion retailers that closed stores experienced greater losses in online sales than those that expanded the number of stores, 22% down for closers compared with a 12% increase for openers.

Further, there’s reason to believe that the losses will continue to mount as time goes by; out of sight, out of mind.

Devil In The Details

The ICSC studied the halo and horn effect on online sales for 69 retailers representing 2,104 individual stores by reviewing $850 billion in credit card transactions to calculate the gains and losses.

“From our previous studies, we knew opening or closing a store impacted online traffic, but with this new study, we got more granular using credit card data,” said Stephanie Cegielski, ICSC’s vice president of research and public relations. “Retailers assume that people are going to go to the online site to make purchases after a store closes, but they often don’t.”

Besides fashion retailers, home and department stores experience online losses far greater than the average. Home retailers tracked a 32% decline in online sales, which doesn’t bode well for the new online-only Bed Bath and Beyond.

Department stores also had online sales drop 26% in the local trading area where they closed stores, adding to the troubles for Macy’s, which just announced five store closures.

Cegieliski says the far greater declines in fashion, home and department store retailers is because they specialize in highly discretionary categories that benefit from in-person discovery and consumers’ desire to touch, feel and try on items in the store.

But even less-discretionary discount department stores experienced a greater than average decline in online sales of 17% after a store closing. That’s bad news for Walmart which closed 24 stores last year and announced two more would shutter this and Target that closed nine stores last year with four more to follow early this year.

Psychological Underpinnings

Consumer psychologist Chris Gray, The Buycologist, explains the halo effect and its opposite, the horn effect, sometimes called the reverse halo effect. “They are cognitive biases that are natural tendencies we all have but are often unaware of.”

He continues: “We tend to form broad opinions about others based on a single characteristic or trait. So based on the halo effect, someone we find attractive is perceived as being more intelligent, morally superior and having other positive qualities.

“The horn effect is the opposite. People who we see as less attractive are often viewed as less intelligent or less moral. These cognitive biases make it difficult for us to have more balanced assessments of people. We generalize from one attribute to form an opinion about a whole person.”

Since brands take on personas, assume human personality traits and seek to have meaningful relationships with customers, it is not a stretch to find consumers apply the halo and horn cognitive biases to brands and retailers.

It explains why people display luxury logos to signal their status or the power of brand taglines to give consumers an instant idea of what the brand is and stands for. For example, if a brand supports a cause that a consumer cares deeply about, they will make good will assumptions about the brand across the board.

“These initial snap judgments can really color or cloud our overall perception of a brand, a retailer or a product,” he said.

Likewise, people make snap judgments about a brand or retailer based upon a single good or bad experience. Gray tells of a major national retailer that opened a number of stores in an inner-city considered a food desert.

The retailer was heralded by local politicians and in the press for giving the community access to fresh, quality food. Then a few years later, the retailer announced those stores were closing.

“The community reaction was immediate and visceral because people felt the company was not fulfilling their promise and they were untrustworthy. It clouded how people felt about the retailer, making it very hard for the retailer to try to come back,” he shared.

Closing a store can signal that the company doesn’t care about the community or its customers. Customers feel betrayed because they put their trust in the retailer to be there and serve them.

And it has an even more personal, negative impact on the store’s employees put out of their jobs. They will tell their friends about how they were treated and the bad news will spread.

“Retailers and brands need to understand that they have a two-way relationship with their customers,” Gray said. “And just like in any relationship, if they are perceived as disrespectful or untrustworthy, it’s going to have a negative impact on the company’s performance.”

Reevaluate Or Close Differently

Simeon Seigel, BMO’s capital markets senior retail analyst, observed in the ICSC report that historically store closures don’t necessarily raise profits and advises retailers to thoroughly measure the potential harm to the brand by closing stores.

“Stress test what the return will be and what you’ll save by removing the fixed costs when closing stores,” he said.

Instead he advises retailers to focus on their pricing strategies to improve margins rather than lose valuable customers. ”Companies are much better off losing volume by cutting promotions than losing volume by closing stores.”

If after a thorough analysis, the decision is made to close a store, retailers should be sensitive to the concerns of both customers and employees. They should send personal notices to loyal customers, even including a gift card to redeem online or at another store. Laid off employees should be helped to find new jobs.

And consider having senior company officials visit the local communities affected, explain the reasons the tough closing decision was made and take the heat; remember Bill Clinton won the presidency by feeling people’s pain.

Closures To Come

Coresight Research estimates major retailers will close some 4,000 stores this year, a drop from the nearly 5,000 that shuttered last year. However, last year’s figure was largely driven by Bed Bath and Beyond, Tuesday Morning and Rite Aid bankruptcies, which took out a total of 1,664 stores.

Because bankruptcies are hard to predict, the total number of closures this year may be far higher than Coresight’s early estimates. So far, it has recorded 592 store closures in 2024.

Regardless of the reason why a retailer decides to close a store, they need to be especially mindful of the the long term losses they may face to their reputation and in consumers’ good will.

BMO’s Siegel says retailers often attribute an an excess of stores and retail space to negatively impacting their performance numbers when other economic factors, such as pricing and positioning, are actually at work.

“Closing a store often feels like a clear-cut action,” he said. “The problem with North America retail is not an oversaturation of stores, but an oversaturation of discounts. It’s not to say that you shouldn’t prune stores if they are cashflow negative, but not when the recapture rate of sales on a closed store is materially lower than it was initially hoped to be.”

About Pam Danziger
Pamela N. Danziger is an internationally recognized expert specializing in consumer insights for marketers targeting the affluent consumer segment. She is president of Unity Marketing, a boutique marketing consulting firm she founded in 1992 where she leads with research to provide brands with actionable insights into the minds of their most profitable customers.

She is also a founding partner in Retail Rescue, a firm that provides retailers with advice, mentoring and support in Marketing, Management, Merchandising, Operations, Service and Selling.

A prolific writer, she is the author of eight books including Shops that POP! 7 Steps to Extraordinary Retail Success, written about and for independent retailers. She is a contributor to The Robin Report and Forbes.com. Pam is frequently called on to share new insights with audiences and business leaders all over the world. Contact her at pam@unitymarketingonline.com.