Question

RWV4 - German drugstore Schlecker closes branches In January 2012, German drugstore chain Schlecker filed for the protection under German bankruptcy laws and an administrator was appointed. At that time it was hoped that the jobs of nearly 50 000 workers in about 10 000 stores across Europe would be safe. The news was not surprising, as the company has closed over 1000 stores in the previous two years as revenues declined. The decline in revenues may have been due to reported cases of being harsh on staff, which permeated the German media during the same time period. By the end of February 2012, the administrators had a clearer picture of the financial state of the Schlecker chain. About 3000 stores were to close with the loss of 13 000 jobs. The administrator is quoted as stating that such closures and job losses were necessary for a 'sustainable continuation of the chain. By mid-March 2012, most staff had been informed and the final number of store closures was approximately 2000, with 12 000 staff affected. All shops which were to be closed immediately started a sale with 30% off all products. In addition to the store closures eight distribution centres were confirmed as definite closures. Since the closures, the company has re-focused itself on the remaining stores, as well as launching a new corporate look and logo. Questions 1. How might the administrator of Schlecker decide which stores to close? 2. Why offer a 30% off sale on products in the stores to be closed down?

Answer 1

Ques1) To decide which stores to close, the Schlecker administrator might use the following metrics

(a) SSS: same store sales ie how much revenue is generated by each store

SSSG: same store sales growth ie by how much has the revenue grown y-o-y from the same store

SSOP: same store operating profit ie how much EBIT is generated by each store

SSP: same store profit, ie how much profit is generated from each store.

Based on the above metrics, the administrator can order the stores in descending order and chose to close those stores that fall in the end, ie stores which have less sales, less profit per store etc

Ques2) A 30% sale is being offered to clear the inventory of the stores being decided to close. If the sale is not offered and products are not sold before closing of those stores, these products will have to be depreciated each year till they are sold. This will impact the P&L by reducing the profit margin. Also with existing inventory, additional storage space will have to arranged which will incur costs & that much amount of inventory will have to be financed which will again reduce the profits of the company