Staying small, staying strong? Retail store underexpansion and retailer profitability

Abstract

Drawing upon the literatures on threat rigidity, the resource-based view of the firm, and investment efficiency, we study the relationship between store underexpansion and retailer profitability. We conceptualize underexpansion as a strategy that can encourage a retailer to operate consistently fewer and smaller stores compared to those expected based on sales. Developing a novel metric that operationalizes this conceptualization and counter to our expectations, we find that underexpansion has a non-negative effect on retailer profitability in the presence of moderators. Specifically, our marginal effect analysis suggests that a better corporate culture, higher selling, general, and administrative (SG&A) capital, and higher intangibility can outweigh the negative direct effect of underexpansion, leading to a positive marginal effect of underexpansion on profitability. These results imply that retailers could benefit from adopting an underexpansion strategy if they have adequate corporate culture, sufficient SG&A capital, or a significant amount of intangible assets.