Bigger's Not Always Better

Gap (NYSE: GPS  ) could be considered a poster child for a particular danger in retail: overexpansion. The last several years of Gap's long, drawn-out turnaround have been pretty mind-numbing, enough so to make one forget there are lessons to be learned. Yesterday, several news agencies reported that Gap's new CEO, Glenn Murphy, plans some serious overhauls to the 40 million square feet of space it leases for its stores.

Plans include putting the brakes on new store openings, shuttering some stores, and relocating, remodeling, or reducing the size of others, aiming to keep most stores between 6,000 and 10,000 square feet. Gap will have a particular eye on Old Navy, and will also be saving some rent costs through certain moves, such as tucking some of Gap's baby and kids' chains into regular stores.

These are solid ideas for the struggling chain. However, the long-awaited turnaround still doesn't seem to be right around the corner, and obviously, there's still some painful downsizing to be done for the once-ubiquitous retail chain, which currently has 3,100 stores.

Too much of a good thing?
Gap serves as a great lesson on how companies can over-expand after years of popularity. We can read similar things into other retailers that may have followed in its footsteps.

For example, has Starbucks (Nasdaq: SBUX  ) pulled a Gap by expanding so aggressively in recent years? TheStreet.com's Business Press Maven recently compared the two in an article culling reader feedback on the coffee giant. Starbucks does have a lot of stores (16,000 in 44 countries!), and it has said it will close some here in the States now that Howard Schultz is back at the helm.

McDonald's has 31,000 stores in 100 countries, and, incredibly, has functioned quite well with what might sound like incredible market saturation. On the other end of the spectrum (and a more apples-to-apples comparison), Caribou (Nasdaq: CBOU  ) has a mere 484 coffeehouses (and, I might add, has struggled with operating profitably).

While it's certainly food for thought (and disconcerting for Starbucks shareholders), I don't really buy it, since an economic downturn is a near-term event and that doesn't necessarily mean Starbucks definitely over-expanded (unless its brand gets tarnished like Gap's did). Gap's comps have stunk during recent good times too, in the midst of a consumer spending frenzy, no less, and that seems like an extremely ominous sign. Then again, I certainly can't dismiss the risk out of hand, since many people argue that at least part of Starbucks' popularity was faddish (and reliant on the spending frenzy of the last decade or so).

Another possible example that springs to my mind is RadioShack (NYSE: RSH  ) . This retailer likes to boast that there's a RadioShack within minutes of where most Americans live or work. Given the doubts many of us have as to whether we even need a RadioShack for most of our electronics needs, that seems like major overkill.

RadioShack has a whopping 6,950 stores, dealer outlets, and wireless kiosks across the U.S. (and a few in Mexico). I know it has closed a few stores here and there as it has worked on a turnaround (last year, I noticed RadioShack closed about 500), but let’s face it, those are cuts with tiny scissors. Best Buy (NYSE: BBY  ) has just 1,300 stores all told, and beleaguered Circuit City (NYSE: CC  ) has less than under 1,500 total stores. RadioShack's huge presence sounds to me like somebody's on radiocrack.

Don't underestimate scarcity
One of the things I like best about Urban Outfitters (Nasdaq: URBN  ) is that it has very modest goals for how many stores it will open for each of its concepts, and it's brainstorming ancillary concepts to continue growth into the future. (Urban Outfitters has just 257 stores, and that includes all of its concepts.)

These concepts (Urban Outfitters, Anthropologie, Free People, and the brand-new Terrain) all give off an air of uniqueness and individuality. Therefore, over-expansion would be the strategic kiss of death. Yep, I'll take the magic of innovation over commoditization any day.

Gap's management has its work cut out for it as it seeks to reverse the problems of the last several years and get back on track again. The way I see it, though, even in reducing square footage, it's still in the midst of a painful process. It still needs to get its merchandise -- and brand -- back in consumers' good graces.

For those of us who have invested in other retail names, while we're all about the great growth possibilities in expansion, we must also hope our companies' managements are well aware of the risks of overly aggressive expansion strategies. We must also be prepared to make difficult decisions with our portfolio if we fear our retailers are getting ahead of themselves and wearing out their welcome by opening more stores than the market can truly bear. After all, over-expansion can have a painful correction period, and that lesson's been amply evident with Gap.  

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Gap, Starbucks, and Best Buy are Motley Fool Stock Advisor and Motley Fool Inside Value recommendations. The Fool owns shares of Starbucks and Best Buy.

Alyce Lomax owns shares of Starbucks and Urban Outfitters. The Fool has a disclosure policy.


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  • Report this Comment On June 11, 2008, at 6:22 PM, Dart65GTConv wrote:

    Agreed, Funny did a little caps today about new Inv. fear of big stock big money. Need balance, takes some foward moving big wieght I think sometimes to push portfolio forward.

  • Report this Comment On June 12, 2008, at 3:22 PM, stapelbroek wrote:

    Comparing the number of Radio Shack and Best Buy outlets seems a bit like comparing grapes and oranges. The square footage and inventory, staffing, etc, are vastly different.

  • Report this Comment On June 13, 2008, at 8:48 AM, RDR28 wrote:

    That is very true when comparing RadioShacks to BigBox BustBuy.

    At least at the Shack, they can help you hook up whatever you though you got as a great deal at Bust Buy.

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