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Investors Look to Retailers to 'Rightsize'

closing store . / Credit: Closed Sign Image via Shutterstock

When a large chain retailer opens a new store, consumers usually welcome the addition to their local shopping landscape. That kind of expansion, though, is usually viewed more skeptically by investors. To them, closing store locations is more strongly associated with increases in firm value than in opening new stores, a new study shows.

This study, published in the Journal of Retailing, is one of the first to examine how store openings and closings affect overall firm value.

The researchers, led by Penn State Smeal College of Business Assistant Professor Hari Sridhar, also found that certain firm characteristics such as market share, advertising intensity, firm age and firm size all have an impact on how investors perceive store openings and closings.

Chain retailers who have staked out a large market share tend to gain firm value when stores are closed, but lose value when stores are opened. Store closings enhance firm value by closing less profitable locations, while new store openings may raise concerns about profitability, researchers found.

Paradoxically, when retailers with high advertising intensity open new stores, investors may perceive the brand image of the firm being diluted, thereby negatively affecting firm value.

Investor preconceptions also come into judging firm value, the researchers found. Because investors believe that older firms tend to be less agile in their response to consumer and market changes, they also believe they are less likely to gain value from opening stores.

Large firms tend to take the short end of the stick in terms of investor sentiment regardless of whether they open or close stores, although they take a bigger hit when they open stores.

The study authors suggest that "any change in strategic direction appears, to the investor market, as arising out of complex strategic issues the firm is facing."

The authors suggest dedicating sufficient attention to investor relations so that investors understand why decisions relative to store openings and closings are being made.

Reach BusinessNewsDaily senior writer Ned Smith at nsmith@techmedianetwork.com. Follow him on Twitter @nedbsmith.We're also on Facebook & Google+.

Ned Smith

Ned was senior writer at Sweeney Vesty, an international consulting firm, and was Vice President of communications for iQuest Analytics. Before that, he has been a web editor and managed the Internet and intranet sites for Citizens Communications. He began his journalism career as a police reporter with the Roanoke (Va.) Times, and was managing editor of American Way magazine and senior editor of Us. He was a Captain in the U.S. Air Force and has a masters in journalism from the University of Arizona.

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