If you were surprised that Forever 21 has filed for Chapter 11 bankruptcy protection, then you weren’t paying attention. The closely held fast-fashion giant plans to close 350 of its 800 stores worldwide, including up to 178 stores in the United States. It’s reportedly pulling out of Canada and Japan entirely, as well as closing most of its European locations.
The result will leave some mall and urban landlords with significant vacancy, as Forever 21 opened larger and larger flagship stores. That, of course, was only one part of the problem. In recent years, the retailer’s merchandise and real estate strategy defied current trends.
Forever 21 produced disposable, casual fashion at a time when young shoppers were extremely cautious about money, and it expanded its footprint during a recession. Now, the customers who shopped Forever 21 as teenagers are entering the workforce, and thus care about (and are willing to invest a bit more in) better quality and sustainability. Deciding that wearing something that falls apart after two washings isn’t a value, many of them are looking to “re-commerce,” such as consignment or thrift stores, to find better quality within their budgets. It isn’t surprising that other value-oriented chains, including Charlotte Russe, Charming Charlie and Payless have already shuttered this year.
The recession also helped create the problematic real estate strategy. With so many retailers closing during the downturn, Forever 21 took advantage of the vacated spaces, many of them large former department stores, including Mervyn’s and Gottschalks. But that meant that it was in a variety of centers and locations, from A+ malls to lesser centers and main streets. Its stores range from 40,000 square feet to 100,000 square feet, such as the Times Square flagship. Today, most specialty apparel retailers are opening small and even pop-up locations.
So, yet again, another retailer has made the same mistakes of not adapting to its core customer as their needs change and evolve and having overly ambitious expansion. (Hi, there, Gap, Limited, et al.) Forever 21 has obtained a total of $350 million in financing from existing lenders and TPG Sixth Street Partners to help “right size” its store base.
“This was an important and necessary step to secure the future of our company, which will enable us to reorganize our business and reposition Forever 21,” said Linda Chang, executive vice president of Forever 21.
Meanwhile, landlords will be left with some serious vacancy. Don’t forget that talks with two of its largest landlords, Simon Property Group and Brookfield Properties, to help rescue the chain with an investment prior to the bankruptcy filing fell through. The announced list of nearly 180 potential store closures include outlet locations, high-traffic malls such as Beverly Center, Westfield World Trade Center and Mall of America, the Soho location on Broadway, Kings Plaza in Brooklyn — and just one Simon project (Roosevelt Field). While lease renegotiations may save some of the stores, challenged retail properties may struggle more.
So what will take these huge spaces? As with other anchor closures, some will be subdivided if possible for smaller retail concepts. Other possible tenants will include food and beverage, healthcare — such as the millionth urgent care office in the area — or some sort of entertainment concept.
Some retail bankruptcies are not completely the fault of the company; Toys R Us was hurt as much by its leveraged buyout costs as competition from e-commerce, competition from discounters and, yes, expensive flagship stores. Forever 21 is privately held, remaining in the hands of its founders, and free from the quarterly growth Wall Street demands of public companies. Its problems could have been prevented with sensible, measured growth and more attention paid to remaining in touch with its core shoppers. But just as this retailer isn’t the first to suffer from these problems, it likely won’t be the last. Just ask any landlord what retailers they’re watching closely on their rent rolls.
As George Santayana wrote, “Those who cannot remember the past are condemned to repeat it.”
Debra Hazel Communications
Arverne, NY 11692