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Don’t Bank on It

The interior of JCPenney's, which declared bankruptcy during the pandemic (courtesy of J.C. Penney Company)

A closer look at the “retail apocolypse”

It’s no secret that the retail sector has been struggling during the pandemic, with several major retailers filing for Chapter 11 bankruptcy in what seems like an endless chain. But what is Chapter 11 bankruptcy, and why have so many retailers used it in the past few months?

Per Investopedia, bankruptcy is a legal proceeding involving a business that is unable to repay its outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor’s assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.

In more simple terms, a company that owes more to its suppliers, landlords, employees, etc. than its sales will repay can file Chapter 11 to protect it from these debts — temporarily. It often means that the company can stay open and earn revenue while it figures out how to pay these debts.

But if you owe more than you take in, there are only two ways to change the situation: generate more sales, or borrow more to pay the debts. So, can you actually emerge from bankruptcy?

There have been case after case of companies filing bankruptcy and being so overwhelmed with the debt service that they have to do the only thing possible: file for Chapter 7 bankruptcy, which may allow discharge of debt and liquidation of assets.

There are fewer cases of companies that have emerged from bankruptcy and stayed viable. Those that did have had to rejuvenate their offering or venture into blue oceans. Examples of this are Apple (near bankruptcy in 1997 and saved by Microsoft — yes, it’s true) and Marvel Entertainment (bankrupt in 1996, now owned by Disney and wildly popular).

Many others, such as Toys R Us and Sears, were too choked by debt and too lost as to what to do. In the apparel industry, fewer still have emerged and stayed out. One example was Wet Seal, which ventured into plus sizing to save itself.

If we view bankruptcy as a disease, its main cause is loss of relevance. Great companies survive all manner of financial downturns, and some may become even more relevant during hard times (think about Amazon and Walmart during the pandemic). This general analysis can be broken down into five main categories for retail bankruptcy.

Loss of Relevance

The retailer was successful or iconic in a former period and failed to maintain its relevance in today’s e-commerce-driven world. Loss of relevance can occur either because the retailer fails to change or is disrupted by other companies taking its business away.

Failure to Evolve

The influencer groups and social imperatives today have changed from years ago. If the company stands on its brand and does not evolve, it becomes a dinosaur — with extinction as the inevitable consequence. The customer’s view of value is changing with the dominance of e-commerce and omnichannel shopping, which has become ubiquitous; Walmart, Amazon and Target are aggressively balancing their online and brick-and-mortar offerings with great success.

Generic Brands

In today’s world, a retailer is also a brand along with any private brands they bring along. Amazon, Costco, Trader Joe’s, Target, Lidl and Walmart all are prime examples of retail branding. As a consequence, self-standing brands lose the loyalty and respect of customers that they used to have.

Polarization of Retail

There are two dominant value perceptions on the part of customers today: either that the value of an item determines its price or that the price of an item determines its value. In the first case, customers are willing to spend more money for quality and longevity. This is common among customers who typically shop for designer or high-end brands. On the other end, a lower price can mean a higher value for consumers. For example, if I get something for $10, it is a greater value than if I paid $20 for it or something like it. Customers who shop at Dollar Tree, Walmart or TJX Companies, for example, may feel this.

Mismanagement

More often than not, in cases of Chapter 11 filings, company management may have trouble determining how to save the business. Leadership might be hamstrung by lenders who want to cut costs and not invest in the company they lent to. Sometimes people are hired from outside because the company has failed to build succession.

Among the examples of recent bankruptcies is my favorite case: Brooks Brothers. The brand has been a dominant name in menswear, especially shirts, for as long as I can remember (and that’s a while!). It lost its way as a brand leader with poor merchandising, including a discount brand (Red Fleece, which was housed in the same physical location), and transitioned its value proposition to the price mode, thus losing its core customer.

Even for companies like J. Crew, JCPenney, Ascena and more, COVID-19 is not the cause of death; it simply accelerated a process that was already underway.

On the other hand, Neiman Marcus may have a good chance to emerge from bankruptcy, as it has made efforts to get closer to its customer and personalize offerings. If the company matches these efforts with great and sustainable investment dressing, it should be able to generate the income necessary to pay down and back the debt.

So what is the answer for those companies that have lost touch? Use the brand name and good will to retool and revitalize. Strip anything that didn’t work, and reinvent. In most cases, as with Sears and J.Crew, the brand has value — it just needs to be applied to the current market.

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