The space race

How many shops are too many?

A few years ago, in a meeting judging some retail awards, the conversation turned to one of the nominated retailers. This was, without question, a fantastic business delivering well for its customers, but what struck me listening to the discussion about them was the particular aspect of their strategy which attracted such admiration from their industry peers.

“The thing about them”, went the discussion, “is that they are really really good at opening new stores - they opened loads last year and are going even faster now”.

That struck me as an odd focus for praise. Opening new shops is difficult, don’t get me wrong, and doing so at the breakneck speed this particular retailer was doing requires a lot of effort and some formidable project management. But surely there are other questions we might ask. Are these the right stores to be opening? Are they in the right places? Do they represent a good return on investment? And of course, just how many stores can one brand open in the UK before it has too many?

I was reflecting on that this week after reading the results of a different retailer, B&M. I yield to no-one in my admiration for the B&M business, which strikes me as one that really knows its target customer and has a great ability to source product and deliver on its value proposition. And sure enough, over the years it has gone from strength to strength, expanding its business, growing its market share and generating pretty good financial returns too.

There are 2 things about this week’s first quarter results that stood out to me, though - one short term and one more strategic.

The short term point is that in this last quarter in the UK, even a mighty engine like B&M has seen its like-for-like sales growth go backwards, falling 3.5% in the period even after adjusting for the timing of Easter. That a business with such a strong focus on value is struggling to maintain its sales at the moment is a further reminder that the stronger headline economic figures we’ve seen recently have got some way to go before they translate into real consumer spending.

The more strategic point, however, is the one that got me reminiscing about that judging panel - it is the strategy on store numbers. B&M has more than 700 stores under that name in the UK already, alongside over 300 Heron branded convenience stores. Reporting around these Q1 results suggests that they are committed to opening at least 45 new B&M branded stores in each of the next 2 years and sees potential for 1200 UK stores overall in the future.

And that just strikes me as a lot of shops! Most modelling of retail park distribution in the UK would suggest that you need about 300-350 stores to be in sensible drive-time of most of the population. I can completely see why a discount-retail model would want more than that to be closer to less mobile customers, but 1200?

I’m sure the analysis the team have done supports that figure, but it does raise 2 issues every retail management team should attend to.

Firstly, what is the right number for the business? Retail history is littered with chains which have over-expanded and come unstuck as a result. The reality is the very often those businesses were telling themselves “all our stores are profitable” right up until they collapsed. You might have 2 or 3 stores in a town which all look profitable at the margin, but it can still be the case that your return on investment in that town would look better if one of those stores closed and some of the business transferred to the ones that remain - and that higher level of profitability might end up being a lifesaver in an economic downturn.

The second thing retail Boards should think about is what kind of ‘growth story’ they are selling their investors. For decades, every retail results release has finished with “and we are going to open xx new stores next year” as a demonstration of the Board’s confidence in the future. But if you convince the market that your only strategy is to grow your store estate, you will put yourself under inevitable pressure to continue to do that long after it stops making sense.

I don’t know if 1200 is too many for B&M or not enough, but I do know that sooner or later it, like every retailer, will need to recognise when other sources of growth are necessary.

(And that other retailer from the awards thing a few years ago? Still opening new stores like their lives depend on it, and still regarded as a huge retail success story, but watch this space).