The sight of shop closures on UK high streets is becoming a sore one. While the number of closures last year (12,800) was down from 2023 levels (14,077), the rate of closures is expected to accelerate again this year due to the upcoming budget tax changes in April.
Under pressure to cut costs, retailers are likely to assess the financial performance of their physical stores and cut the locations operating at a loss. The thinking is that this will naturally save the brand money.
But what are retailers actually doing when they shut shops? Do they know the broader impact of what happens when they do so? While their reasoning makes sense at face value, they are often closing them for the wrong reason.
In actual fact retailers shouldn’t be shutting up shops – but it’s not because those stores can necessarily make a profit.
A tragedy for brand revenue
EBIT and EBITDA are metrics that enable retailers to assess whether stores are profitable. In other words, once they’ve paid the rent, staff, rates, electricity etc., out of all the products they sell versus the cost of those goods, what is the actual profit contribution that store makes to the business?
The consensus is stores need to be profitable. Therefore, many CFOs will go down a store list and go “that makes a negative EBIT contribution, get rid of it”. Yet this strategy can be counterproductive to overall efforts. Do some stores make a negative EBIT/EBITDA contribution? Of course. But the key point is that a contemporary customer strategy is way more than just a shop.
Aesop is a fine example of a beautiful shop – it’s perfect for creating word of mouth marketing. Yet when retailers shut a shop they not only lose this word of mouth promotion, but their website revenue in that area will also dip because people don’t know they exist. So, shutting a shop can be a tragedy for your overall brand revenue.
Even if you have shops making individual losses, what matters more is how overall revenue is looking and taking a holistic view of how stores are contributing to brand performance. This is the unified commerce strategy.
The unified commerce strategy
While stores are an amazing marketing and advertising chip, there are deeper, financially motivated reasons for maintaining loss-making stores too. Next’s Annual Report and Accounts from 2022 paints a clear picture for how keeping stores with negative EBIT contributions open directly supports its unified commerce strategy.
Its forecasting shows that while the next 15 years has -10% like-for-like sales declines in its stores, “the Retail business does not represent a significant financial burden or hindrance to the Group. In fact, it provides a network of stores that remain important to Online sales.”
As the report outlines, closing them would pose a threat to its online sales, as it would lose a host of its online collection and return locations. So, it has assumed the business will keep “open a further 195 loss-making Retail stores” to ensure that it maintains “coverage at c.90% of 2021’s collection volumes”.
It makes total sense. Imagine a customer is shopping on Next’s website. They’re interested in a product and check the returns policy, as they usually take a return back to the shop because it’s free. In theory, if you shut that shop and that option is no longer available, you won’t get that future web sale, as you’ve made it harder to return that item. So, a store represents much more than what it says on the P&L statement.
But while this strategy makes sense strategically, it still doesn’t account for the fact many businesses are facing tough economic headwinds – and they need to protect margins and drive revenue.
AI price elasticity
The above are the strategic reasons for not shutting. But a CFO might then say, “Well, we can implement this approach, but we need to start making some money.” With trading conditions so difficult, retail and supply chain managers have to find ways to optimise pricing and markdowns on their products to boost revenue and profitability, otherwise they can miss out on significant margins.
For example, you’ll often see blanket discounts on products to incentivise sales (“40% off all items – limited time only!”). But what if these retailers were able to optimise markdowns for each product in relation to demand? This is where a concept called ‘price elasticity’ can move retailers ahead of the pack.
Price elasticity is the impact a change in price has on demand. How ‘elastic’ a product is determines how easily or not a change in price triggers sales. Working out such a calculation, however, is a complex task without the right tools.
Unified commerce encompasses many touchpoints, from the physical store to social media. With so many demand and pricing variables, for retailers to truly optimise pricing and ensure they are maintaining profitability across their channels, they need to turn to AI.
AI can analyse and model hundreds of thousands of stock keeping units and price combinations to create ‘price elasticity’ models for each product. Retailers can then visualise how various markdowns and pricing could impact demand in line with business KPIs – for example, they could target a particular store location alongside online sales for that area.
Above all, AI gives you the ability to scenario plan and add better precision and control to how you are pricing across your business, never mind just in the physical retail estate.
No tragedy with physical shops and AI
In 2025, more than ever, it is a branding and unified commerce tragedy to shut a physical retail shop.
Shops are so much more than a transactional shop front. They advertise hoard for you in real life, they contribute to the digital P&L, and they make the convenience of picking something up from the web or returning it so much stronger. What’s more, they offer a brilliant way to capture data on customer preferences too.
With this outlook, it can be very myopic to just shut a shop because it’s making a negative EBITDA contribution. But CFOs still need to make money amidst a turbulent economic landscape. So, where retailers can really maximise their margins and profits is through controlling price elasticity – and the brands with elite processes are using AI to do just this.