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The Effects of Opening and Closing Retail Stores on Firm Value

For many large chain retailers, closing store locations is more strongly associated with increases in firm value than opening new stores, according to a recently study published in the Journal of Retailing co-authored by Smeal College of Business Assistant Professor Hari Sridhar. This study is one of the first to examine how openings and closings impact overall firm value.
March 26, 2013

Hari Sridhar
Hari Sridhar

For many large chain retailers, closing store locations is more strongly associated with increases in firm value than opening new stores, according to a recently study published in the Journal of Retailing. Decisions on store openings and closings are commonly made to affect performance at the product and consumer levels, but this study is one of the first to examine how these openings and closings impact overall firm value.

The researchers—Penn State Smeal College of Business Assistant Professor Hari Sridhar and his colleagues from the University of Texas and Michigan State University—also found that certain firm characteristics moderate the effects of opening and closing store locations. They show that market share, advertising intensity, firm age, and firm size all have an impact on how investors perceive store openings and closings, subsequently affecting shareholder value.

Market Share
Researchers find that chain retailers with a high market share tend to gain firm value when stores are closed but that value suffers when new stores are opened. Store closings enhance firm value by closing less profitable store locations, but new store openings may raise concerns about profitability.

Advertising Intensity
High advertising intensity in a firm sends signals of high brand equity and financial wellbeing. When retailers with high advertising intensity open new stores, investors may perceive the brand image as being diluted, thereby negatively affecting firm value. Store closings, on the other hand, strengthen the premium brand image and narrow focus into core customers, increasing firm value.

Age
Because older firms tend to be less agile in their response to consumer and market changes, they are less likely to gain value from opening stores. When an older retailer closes stores, however, investors tend to view this as an effort to downsize operations to better focus on core business, thereby increasing firm value.

Size
Large firms tend to lose value for both opening and closing stores, though the effect is greater for opening stores. Large firms are seen to have limited growth potential because of the high investment in their existing structures; however, they also have financial and human resources and well-established organizations that could support profitability in new stores.

Authors infer that “any change in strategic direction appears, to the investor market, as arising out of complex strategic issues the firm is facing.” They suggest dedicating sufficient attention to investor relations so that investors understand why decisions relative to store openings and closings are being made.

The paper, “Effects of opening and closing stores on chain retailer performance,” appeared in the Journal of Retailing. Authors include Hari Sridhar, assistant professor of marketing at the Penn State Smeal College of Business; Raji Srinivasan and Debika Sihi of the McCombs School of Business at the University of Texas at Austin, and Sriram Narayanan of Michigan State University’s Eli Broad College of Business.

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At a Glance

Researchers say that chain retailers—particularly those well-established firms with high market share and advertising intensity—are more likely to gain value from closing existing (and potentially unprofitable) stores than from opening new ones. They investigate how firm characteristics such as market share, advertising intensity, age, and size moderate investor perceptions of retail location openings and closings, thereby affecting overall firm value.

  • Firms with high market share, or high advertising intensity, tend to gain more value from store closings than new location openings.
  • Older firms tend to gain value from store closings and lose value from store closings.
  • Large firms tend to lose value from both opening and closing stores because investors see any change in strategic direction as a response to existing firm problems.
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