Store Closings and Retailer Profitability: A Contingency Perspective

Retailers constantly face the decision of whether to close existing stores and/or to open new ones. Closing a store may reduce a retailer’s costs, while opening a new store may increase revenue. Thus, it is far from obvious which action yields the maximum profit. Furthermore, retailers need to align these store-by-store tactical decisions with their overall distribution strategies to achieve a superior performance. Using a sample of 157 public retailers from 1999 to 2015, this study examines how store closings and openings are associated with retailer profitability. To complement extant research, we construct a parsimonious measure that captures a retailer’s store management decision, namely, net store closings (NSC). Drawing on the contingency theory of organizations, we develop a comprehensive framework that studies the moderating roles of retailer competencies, retailer resources, and retail environment. Through panel fixed effects estimation, we identify ten contingent factors that significantly moderate the relationship between NSC and profit. Specifically, e-tail experience, total experience, receivables intensity, retailer innovativeness, industry e-tail prevalence, and industry concentration positively moderate the association between NSC and subsequent profitability, while inventory turnover, sales force intensity, capital intensity, and firm size negatively moderate this association. In addition, we explore how individual measures (i.e., store closings and store openings) are associated with retailer profitability and find consistent results. Anecdotal and statistical evidence indicates that NSC is a sufficient measure of store management actions. The study has important implications for how retailers should manage their channel distribution strategies and resource allocation decisions.