How Retailers Decide Where to Close a Store

As online shopping has grown popular over the last couple of decades, many retailers have shifted resources from physical locations to online platforms. The COVID-19 pandemic has only accelerated those changes, leaving shopping centers without anchor tenants. That creates a downward spiral by reducing foot traffic for those that remain.

In a recent report, Moody’s Analytics attempts to understand what stores retailers choose to shutter versus keep open using the six components on the Moody’s Analytics Commercial Location Score (CLS): business vitality, economic prosperity, spatial demand, safety, transportation, and local amenities. It uses proprietary data to examine the status of more than 1,000 properties recently occupied by one of six well-known national department store retailers

Moody’s found that store closures are most related to declines in the level of economic prosperity, spatial demand and diminished access to quality transportation infrastructure. Firms are also prioritizing locations with sold transportation characteristics to ensure easy accessibility for their remaining locations.

It’s little surprise that areas with higher incomes are more attractive to most retailers. Even during financial restructuring, retailers want to maintain a presence in areas with strong economic potential.

But Moody’s found that firms seem to be prioritizing ease of access to the location even over characteristics of the local population. With access to better transit, retailers pull customers from a larger radius and increase shopping frequency. In a world with fewer stores, the ones that remain open will need to provide access for a larger number of potential customers.

Even a strong location with good access to transportation can run into problems if there is oversaturation in the market. Too much competition can negatively impact values by reducing market share. Still, Moody’s says the value of being in a shopping destination outweighs dealing with competitors as long as the number of retailers isn’t too big. It says this line of reasoning supports companies like JCPenney and Macy’s putting stores in the same mall.

Cost also matters in the equation. If households or commercial entities increase the demand for a location, rent will rise. If the rents are too high, it could offset the advantages of being near good transportation or in a high-income area.

Bottom line: as economic activity increases in an area, profitability rises and a destination is formed. But if there is oversaturation, that value created can be lost for retailers.