A loss-making branch is judged on the costs that disappear when it closes
17 October 2026, 09:33
On 16 October Galeria, the German department store chain that has been in insolvency since the start of the month, began its search for investors, and the provisional administrator, Frank Kebekus, will assess the economic viability of each of its 83 branches. It is an assessment that applies, on a smaller scale, to every business with several stores, departments or product lines: working out where the company makes money and where it loses it.
A branch's result depends on how the shared overheads are divided
To understand where it makes money and where it loses it, a company needs a profit and loss account for each of its parts. Each store thus becomes a profit centre: a unit whose revenue, costs and therefore result are measured.
Two kinds of item go into that account. Direct costs belong to the individual store and can be attributed precisely: the goods sold, the shop staff, the rent on the premises, the utilities. Shared overheads serve all the branches together: administration, the purchasing office, the central warehouse, IT systems, senior management. To arrive at the result of each branch, the shared overheads have to be divided, and the simplest way is to do so in proportion to turnover.
Shared overheads remain even after the closure
When a branch closes, its direct costs stop, sometimes with a delay: the rent, for instance, runs until the lease or the notice period expires. Shared overheads, on the other hand, almost all remain. Administration and IT systems cost more or less the same with one branch fewer, and the share that used to be charged to the closed branch passes to the others.
For this reason, when deciding whether to close a branch, the result that counts stops before the shared overheads are divided: the branch's revenue minus only the costs that would disappear with the closure. If the difference is positive, the branch pays part of the shared overheads, even when its full account shows a loss. Closing it removes that contribution, and the result of the business as a whole gets worse.
An example. An electrical supplies distributor has a turnover of €13 million a year across several branches. One of them, after the goods sold, staff, rent and utilities of the shop, leaves €300,000 every year. Head office charges it €500,000 of shared overheads, divided in proportion to sales, and the branch's account shows a loss. With the closure the surplus of €300,000 disappears, while the shared overheads pass to the other branches: the distributor earns €300,000 less.
Dividing in proportion to turnover hides who uses head office's services
The typical mistake has two sides. The first is the one in the example: judging a branch on its result after the shared overheads have been divided, and closing a unit that was helping to pay them.
The second lies in the division itself. Sharing out the overheads in proportion to turnover means assuming that every euro sold asks the same amount of work of head office. It does not: a branch that receives many small orders, asks for frequent deliveries and needs constant support takes up more of the administration and the central warehouse than one that sells a few large supplies. With the division in proportion to turnover, the first branch looks more profitable than it is, the second less. An objective criterion follows the cause of the expense: the number of orders for administration, deliveries for the warehouse, hours for support.
The same applies to the departments of a plant and to product lines. A line with low direct costs that nonetheless takes up many hours of the technical office, support and logistics may not cover the shared overheads it gives rise to.
In a company's own accounts, the costs that stop are separated from those that remain
A cost analysis by branch starts from the chart of accounts: each item is assigned to the branch, department or line that generates it, and whatever cannot be assigned stays shared. For each unit three lines are then read: revenue, direct costs and the difference between the two. Only afterwards is the share of shared overheads added, divided using criteria linked to use.
Before deciding on a closure, it is also worth checking which head office services would really cost less with one store fewer: a van, a warehouse shift, a maintenance contract. Those savings are subtracted from the difference between the branch's revenue and its direct costs. The investment needed to keep the branch open, such as refurbishing the premises, is subtracted from the same difference.
If what remains is positive, the branch helps pay for everyone's structure. The useful question then becomes a different one: how to make it earn more, or which shared services to reduce so that each branch carries a lighter share.
This article was prompted by a news item published in Handelsblatt on 16 October 2026.