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“They’re looking at their business and saying, ‘I don’t need that store’”

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On Tuesday, the US subsidiary of French beauty giant L’Occitane International filed for Chapter 11 bankruptcy following repeated attempts to engage with its landlords to address “unmanageable store lease terms”. 

The retailer plans to close 23 unprofitable stores to rightsize its US store network for the future. It currently has 166 stores in that market.

This is a course correction from the days when retail growth meant “putting a shop on every corner”, according to Sydney-based retail expert Brian Walker, founder and CEO of The Retail Doctor. 

“Retailers are looking at their portfolio and finding that – in their push for growth – they quite often paid too-high rent to get a site,” he told Inside Retail

“They’re looking at their business and saying, ‘I don’t need that store’.”

The rise of online is a key part of the right-sizing trend, according to Walker. 

“When a retailer’s only option was a physical store, landlords charged the rent they charged,” he said.

But with a slick e-commerce site and a basic understanding of digital marketing, retailers no longer need to open new stores to reach more customers. 

“As online grows, the rocks in the lake are being exposed and the incremental revenue [from opening stores] is disappearing,” Walker said. 

Covid-19 has further accelerated the shift to online shopping. Online sales now account for over 38 per cent of L’Occitane’s global net sales, nearly twice as much as they did last year. 

That’s why Walker sees the restructure not as a sign that anything’s amiss at L’Occitane, but rather as a smart strategic move. 

“It’s still an extremely competitive brand and a very successful product,” he said. 

Dependent on travel

The Chapter 11 bankruptcy filing came on the same day that L’Occitane reversed two quarters of negative growth and reported a 4.3 per cent increase in global net sales at constant rates in its unaudited results for the period ended December 31, 2020. 

But a closer look at the sales figures shows this growth was driven almost entirely by Asia, where the double-digit sales growth in China, Japan, Taiwan and Korea was enough to offset double-digit sales falls in the US, Brazil, Russia and France. 

One reason is that travel retail sales rebounded in Asia, thanks to a domestic travel boom, while travel remains down in the US, where Covid-19 is still widespread. 

“A lot of [L’Occitane’s] physical network is in and around airports and transit areas,” Walker said, “that’s a core part of their strategy.” 

With international travel still severely impacted by the pandemic, this could be a challenge for the retailer, but Walker said the business is diversified enough that it’s not a major concern. The retailer’s strong online growth could also help offset its reliance on travel retail.

“Overall, it’s a really healthy business,” Walker said.

Better than expected results

In the nine months to December 31, 2020, representing the first three quarters of L’Occitane’s fiscal 2021, net sales were €1.19 billion, a year-on-year decrease of just 5.4 per cent at constant rates. This was an improvement from the 13.1 per cent year-on-year decrease recorded at the end of the first half.

L’Occitane’s chairman and CEO Reinold Geiger said it was “very encouraging” to see the continued sales momentum, despite the resumption of lockdown measures in some markets. 

“This is a testament to the strength and resilience of our teams and of our brands,” he said.

The best-performing brand by far in L’Occitane’s portfolio is its namesake L’Occitane en Provence, which reported net sales of €470.45 million in the quarter ended December 31, 2020. Next is Elemis, with €51.82 million in net sales, followed by LimeLife by Alcone with €24.78 million. The other brands in the portfolio are Melvita, Erborian and L’Occitane au Brésil. 

With the US restructure and a reorganisation in the head office, resulting in 300 job losses, Geiger said the retailer expects to deliver better results than initially targeted at the start of FY21.

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