November 5, 2008
Retailers Head Straight to Liquidation
By Tom Ryan
What happened to the restructuring
process? A storm of retailers, including Meryvns, Levitz, and Value City,
are choosing to liquidate rather than reorganize under Chapter 11 protection.
The financial crisis has worsened prospects for finding potential buyers
in a reorganization, as well as obtaining the financing needed to pay creditors,
suppliers and employees.
Some attendees at the
recent Turnaround Management Association annual meeting lamented that a
lack of financing could deprive many advisers of much-needed time and money
to repair ailing firms.
“Many of the patients
are getting to us too late, I fear,” Henry Miller, co-founder of the
turnaround firm Miller Buckfire, told The Wall Street Journal.
Last week, Levitz Furniture
filed a motion to liquidate its remaining 76 stores last week within fifteen
days of its bankruptcy filing. Mervyns had filed for Chapter 11 in July,
hoping to close just 26 stores, but said last week it would close all of
its remaining 149 stores after turnaround efforts failed. Value City Department
Stores filed Chapter 11 bankruptcy on Oct. 27 with plans to liquidate all
of its 66 stores.
Sharper Image Corp,
Wickes Furniture, Bombay Co. and Shoe Pavilion have filed for bankruptcy
and liquidated their stores within the past year. Whitehall Jewelers, Linens
‘n Things and Shoe Pavilion are undergoing GOB sales.
In past years, troubled
retailers could file for bankruptcy protection from creditors, exit bad
store leases, and re-emerge a smaller, more profitable operation. Bankruptcies
such as Macy’s and Barneys lasted over two years. The bankruptcy of McCrory
Corp. in the nineties lasted five years before the five and dime chain liquidated.
Besides credit availability, a Chicago Tribune article noted a lack
of potential buyers is increasing liquidations. Private-equity firms are
no longer flush with cash to buy retailers for their real estate or turnaround
prospects. Many bigger chains that had been obvious buyers in the past are
cutting back expansion plans. Credit terms from vendors are also very tight.
“The best retailers
are monitoring the health of their vendors and good vendors are looking
hard at the creditworthiness of retailers,” Howard Brod Brownstein,
principal at Hachman Hays Brownstein Inc. who oversaw Montgomery Ward’s
bankruptcy in 2000, told the Trib.
“Everybody’s at Defcon 3.”
Discussion Questions:
Is there something beyond the credit crunch that has led to the increase
in liquidations at retail? Has it become tougher for retailers to turn
around? How does this greater liquidation risk change retail strategies?
BrainTrust
Recent Discussions
Discussion Questions
Poll
It is often reported that a company goes into a Chapter 11 to protect themselves while they are able to restructure the company to survive profitably. The fact is that most companies that have a projection to survive already have a good idea of whom and what are going to drive the restructuring process. Participants are often identified and upon the filing, the work starts that may take weeks, months or years.
What is happening today is that the retailers are heading into potential Chapter 11 situations without being able to identify where funds are coming from to use in restructuring. Without identifying those funds, they continue to delay the filing in hopes of finding the needed resources to help in the restructuring. The longer they wait, the more difficult the situation gets. Eventually, they must file or their creditors will. Post filing, the next step is to review the filing in bankruptcy court within a week or so after submission. The bankruptcy judge will ask for a plan and if the company has no viable plan for moving forward, a liquidation is declared.
The credit crunch is certainly responsible for many of the recent difficulties. But these trends have been present for several years. Retail expanded on the purchasing power of the consumer but expanded well beyond that purchasing power. The ability for a chain to expand is almost infinite. The ability for the consumer to support that expansion is very finite.
The increase in liquidations points out that the pace of retail consolidation is speeding up. The credit crisis has accelerated the demise of stores that weren’t strong enough to survive over the long run. This is a far cry from the sort of restructuring that Macy’s went through in the 90s, where its underlying concept was sound. In this wave of closings, we’re witnessing stores which were in many cases also-rans in terms of merchandise content, store experience and branding.
I agree with those who note that the move straight to liquidation is a reflection of inherently flawed business models, business processes, and a lack of creative leadership. In order to emerge from Chapter 11, a company has to be able, in advance, to identify the elements of its organization which require surgery….amputation, selective removal, rerouting, etc.
The sad truth is that most of these companies have no compelling value proposition, do not have a competitive advantage that’s even remotely defensible, and lack the insight to make the changes needed to cure operational inefficiencies. Hence the lack of Chapter 11 filings.
I am not trying to be “rough”…..the boom economy of the past 15 years has enabled a multitude of inefficient and indefensible retail stores to remain open. The competition was in capturing aspects of a growing market. One of the characteristics of a growth market is it is tolerant of new options….until they prove pointless. Recession markets are NOT tolerant…of anything.
Look for more, not fewer liquidations. Strictly from an economic point of view, this is a cyclical necessity. The human cost is enormous, and deeply felt. However, the market adjustment is completely expected.
When asked at last week’s Women’s Wear Daily apparel CEO Summit whether Mervyns could have been saved, Allen Questrom gave what I thought was a great answer: “It could have been saved a long time ago.” I’ll stretch that to say that “a long time ago” was when Mervyns was thought of as a brand, yet through years of benign neglect, it turned into just another place to shop.
We’re living in a time when store-as-brand is a necessary point of view; brand is everything and brand deals are happening left and right despite tough economic times. With the exception of Sharper Image (which went on to find new life as a brand, not a store), I think we’re simply seeing the dissolution of quite a few “places to shop.”
I have a mixed reaction to all this.
On a personal level, I’m sorry to see Mervyns go, though it’s had a diminishing presence in my area for years…and I’m only 15 miles from HQ!
But on a more general level, I have to think it’s about time the revolving door of Chapter 11 is slowed. Sure, no one wants to bring back debtor’s prison; but this bankruptcy-as-a-business strategy is out-of-hand…too much leverage, too much debt and too many unsound business models = too many stores.
Earlier this year Newsweek ran an article called “America the Overstored.” I think the credit crisis has “sped up” the inevitable, not caused it.
There are three basic factors at work that are forcing the decline in physical stores. The first is the growing popularity of internet shopping. The second is the fact that most of the baby boomers are entering retirement age and don’t need as much “stuff,” focusing their purchases on travel/entertainment and health/beauty instead of apparel and home decor. The third factor is that the next generation of buyers grew up with a lot of “stuff” and want their purchases to mean something beyond an accumulation of “stuff.”
What this means is that there will be smaller quantities of goods purchased and more interest in buying goods that are special or meaningful to the buyer in some way. Right now, these meaningful purchases are down because of the overall economy, but they will grow as the economy gets better. Those retailers who survive must understand what and how the Gen X/Yers expect from retail. Those who are heading to liquidation are generally not in this category.
As other panelists have pointed out, we are over-stored. These retailers know they are licked. I don’t blame it on the credit crunch. I blame it on retailers who simply cannot provide a compelling shopping experience.
Retailing in nearly all categories has been overbuilt for some time. In our heart of hearts we all know this. The credit crisis has merely magnified it. Retailers which were struggling to get customers during an unprecedented economic boom time (albeit a somewhat bubbly faux boom time) will surely not be able to survive or change in any meaningful way to acquire new customers during a lengthy economic downtime. Better for the country and the retail industry that these weak companies just go away, although it is obviously a blow for their employees and for the purveyors of retail real estate space.
But, there will be more than enough remaining retailers and suppliers in each category to handle reduced customer demand during a lengthy recession and these will be more able to survive and grow and prosper going forward.
Having worked on trying to save some bankrupt retailers, I see a difference today. First, the majority of retailers that went through Chapter 11 came out too soon. They fixed the surface problems but not the root causes.
Second, most have lost touch with the consumer.
Third, most have an outdated business model. The market changes and once successful retailers simply hope and pray that the good times will come back. New retailers and products redefine the market and bankrupt retailers simply fail to recognize this change.
Fourth, management refuses to make the hard decisions quickly. All they do is slow down the downward spiral.
The result is that many of the companies are so depleted that there is nothing to turn around. The shortage of credit and buyers is adding to the liquidations but it is also an over-stored market for many segments.
Unless you have a great idea for differentiating yourself from your competitors or a way to save costs, what good does restructuring do?
I read recently that over 25,000 stores had opened since 2000.
I think it is fairly safe to say that we did not need a large proportion of them.
This manifestation of evolution may be somewhat dramatic but it is long overdue. It’s about time that retailers had to survive based on their business acumen, merchandising skills and relevance.
Filling racks with stuff is not retailing. Has anyone seen any calculations on the potentially positive environmental impact of producing far less rubbish that nobody wants or needs?
Turning around retailers in the current economy is risky business. In today’s economic climate it requires a sound value proposition and great execution. Add to that the cost of acquiring financing to upgrade a retail chain, the odds of acceptable ROI diminish further. With so much shopper choice in the retail landscape, only the strong will survive in tough times. Watching Sears and others struggle to change, it’s not surprising that liquidations are increasing.
I believe the movements straight to liquidation are a direct result of the credit crisis. Lack of willingness by banks to provide DIP financing, and then some companies being forced into Chapter 11 in the first place because their seasonal credit lines are getting squeezed (caused by bank re-valuation of their inventory assets).
Factors, we’re used to. But banks walking away from DIP financing is a direct result of our current economic mess.
I would agree with Richard. The companies that reorganized rarely learned from their mistakes and only restructured to lose another day. Many times when its broke; don’t try to fix it.
More Discussions
As Boomers ‘Age Out of Peak Purchasing,’ How Can National Brands Retain Interest With Gen Z?
According to a recent First Insight study titled “Is Gen Z Still Choosing Your Brand,” while…Is Supply Chain Volatility Here To Stay?
Can we expect an ongoing volatility to remain in terms of retail supply chain?Has Same-Day Delivery Become an Expectation Across Retail?
Are expectations around retail delivery speed in flux?
It is often reported that a company goes into a Chapter 11 to protect themselves while they are able to restructure the company to survive profitably. The fact is that most companies that have a projection to survive already have a good idea of whom and what are going to drive the restructuring process. Participants are often identified and upon the filing, the work starts that may take weeks, months or years.
What is happening today is that the retailers are heading into potential Chapter 11 situations without being able to identify where funds are coming from to use in restructuring. Without identifying those funds, they continue to delay the filing in hopes of finding the needed resources to help in the restructuring. The longer they wait, the more difficult the situation gets. Eventually, they must file or their creditors will. Post filing, the next step is to review the filing in bankruptcy court within a week or so after submission. The bankruptcy judge will ask for a plan and if the company has no viable plan for moving forward, a liquidation is declared.
The credit crunch is certainly responsible for many of the recent difficulties. But these trends have been present for several years. Retail expanded on the purchasing power of the consumer but expanded well beyond that purchasing power. The ability for a chain to expand is almost infinite. The ability for the consumer to support that expansion is very finite.
The increase in liquidations points out that the pace of retail consolidation is speeding up. The credit crisis has accelerated the demise of stores that weren’t strong enough to survive over the long run. This is a far cry from the sort of restructuring that Macy’s went through in the 90s, where its underlying concept was sound. In this wave of closings, we’re witnessing stores which were in many cases also-rans in terms of merchandise content, store experience and branding.
I agree with those who note that the move straight to liquidation is a reflection of inherently flawed business models, business processes, and a lack of creative leadership. In order to emerge from Chapter 11, a company has to be able, in advance, to identify the elements of its organization which require surgery….amputation, selective removal, rerouting, etc.
The sad truth is that most of these companies have no compelling value proposition, do not have a competitive advantage that’s even remotely defensible, and lack the insight to make the changes needed to cure operational inefficiencies. Hence the lack of Chapter 11 filings.
I am not trying to be “rough”…..the boom economy of the past 15 years has enabled a multitude of inefficient and indefensible retail stores to remain open. The competition was in capturing aspects of a growing market. One of the characteristics of a growth market is it is tolerant of new options….until they prove pointless. Recession markets are NOT tolerant…of anything.
Look for more, not fewer liquidations. Strictly from an economic point of view, this is a cyclical necessity. The human cost is enormous, and deeply felt. However, the market adjustment is completely expected.
When asked at last week’s Women’s Wear Daily apparel CEO Summit whether Mervyns could have been saved, Allen Questrom gave what I thought was a great answer: “It could have been saved a long time ago.” I’ll stretch that to say that “a long time ago” was when Mervyns was thought of as a brand, yet through years of benign neglect, it turned into just another place to shop.
We’re living in a time when store-as-brand is a necessary point of view; brand is everything and brand deals are happening left and right despite tough economic times. With the exception of Sharper Image (which went on to find new life as a brand, not a store), I think we’re simply seeing the dissolution of quite a few “places to shop.”
I have a mixed reaction to all this.
On a personal level, I’m sorry to see Mervyns go, though it’s had a diminishing presence in my area for years…and I’m only 15 miles from HQ!
But on a more general level, I have to think it’s about time the revolving door of Chapter 11 is slowed. Sure, no one wants to bring back debtor’s prison; but this bankruptcy-as-a-business strategy is out-of-hand…too much leverage, too much debt and too many unsound business models = too many stores.
Earlier this year Newsweek ran an article called “America the Overstored.” I think the credit crisis has “sped up” the inevitable, not caused it.
There are three basic factors at work that are forcing the decline in physical stores. The first is the growing popularity of internet shopping. The second is the fact that most of the baby boomers are entering retirement age and don’t need as much “stuff,” focusing their purchases on travel/entertainment and health/beauty instead of apparel and home decor. The third factor is that the next generation of buyers grew up with a lot of “stuff” and want their purchases to mean something beyond an accumulation of “stuff.”
What this means is that there will be smaller quantities of goods purchased and more interest in buying goods that are special or meaningful to the buyer in some way. Right now, these meaningful purchases are down because of the overall economy, but they will grow as the economy gets better. Those retailers who survive must understand what and how the Gen X/Yers expect from retail. Those who are heading to liquidation are generally not in this category.
As other panelists have pointed out, we are over-stored. These retailers know they are licked. I don’t blame it on the credit crunch. I blame it on retailers who simply cannot provide a compelling shopping experience.
Retailing in nearly all categories has been overbuilt for some time. In our heart of hearts we all know this. The credit crisis has merely magnified it. Retailers which were struggling to get customers during an unprecedented economic boom time (albeit a somewhat bubbly faux boom time) will surely not be able to survive or change in any meaningful way to acquire new customers during a lengthy economic downtime. Better for the country and the retail industry that these weak companies just go away, although it is obviously a blow for their employees and for the purveyors of retail real estate space.
But, there will be more than enough remaining retailers and suppliers in each category to handle reduced customer demand during a lengthy recession and these will be more able to survive and grow and prosper going forward.
Having worked on trying to save some bankrupt retailers, I see a difference today. First, the majority of retailers that went through Chapter 11 came out too soon. They fixed the surface problems but not the root causes.
Second, most have lost touch with the consumer.
Third, most have an outdated business model. The market changes and once successful retailers simply hope and pray that the good times will come back. New retailers and products redefine the market and bankrupt retailers simply fail to recognize this change.
Fourth, management refuses to make the hard decisions quickly. All they do is slow down the downward spiral.
The result is that many of the companies are so depleted that there is nothing to turn around. The shortage of credit and buyers is adding to the liquidations but it is also an over-stored market for many segments.
Unless you have a great idea for differentiating yourself from your competitors or a way to save costs, what good does restructuring do?
I read recently that over 25,000 stores had opened since 2000.
I think it is fairly safe to say that we did not need a large proportion of them.
This manifestation of evolution may be somewhat dramatic but it is long overdue. It’s about time that retailers had to survive based on their business acumen, merchandising skills and relevance.
Filling racks with stuff is not retailing. Has anyone seen any calculations on the potentially positive environmental impact of producing far less rubbish that nobody wants or needs?
Turning around retailers in the current economy is risky business. In today’s economic climate it requires a sound value proposition and great execution. Add to that the cost of acquiring financing to upgrade a retail chain, the odds of acceptable ROI diminish further. With so much shopper choice in the retail landscape, only the strong will survive in tough times. Watching Sears and others struggle to change, it’s not surprising that liquidations are increasing.
I believe the movements straight to liquidation are a direct result of the credit crisis. Lack of willingness by banks to provide DIP financing, and then some companies being forced into Chapter 11 in the first place because their seasonal credit lines are getting squeezed (caused by bank re-valuation of their inventory assets).
Factors, we’re used to. But banks walking away from DIP financing is a direct result of our current economic mess.
I would agree with Richard. The companies that reorganized rarely learned from their mistakes and only restructured to lose another day. Many times when its broke; don’t try to fix it.