August 27, 2008
The Bankrupt Company’s Guide to Chapter 11
There have been a spate of retailers filing for Chapter 11 bankruptcy of late and, as an About.com article points out, most will not be any more successful following their reorganization than prior to having to seek the protection of the court.
Historically, however, a few have been able to use their time under Chapter 11 wisely and come out stronger as a result. Federated Stores (Macy’s), Southland (7-Eleven) and Winn-Dixie are examples cited by the article’s author Barbara Farfan.
Federated’s approach, Ms. Farfan wrote, was to change its merchandising and buying strategies to create efficiencies enabling it to compete with rivals, including those selling discount apparel.
Southland chose to remake its image with extensive store remodels and pursuing “a huge philosophical shift from ‘insult pricing’ to ‘everyday fair pricing.’”
Winn-Dixie, the most current example, chose to concentrate its efforts on changing its information technology operations and systems to create savings that the company counted on to become profitable post-Chapter 11.
Discussion Questions: Why do so many retailers that file for Chapter 11 protection fail to see what needs fixing before reaching the point of bankruptcy? What do you think is most important for retailers looking to emerge from Chapter 11 and become successful once again?
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In organizational performance, any gap between a desired circumstance and the actual circumstance can be attributed primarily to mindset. It is amazing to me how many times the Universe has to put us through the wringer before it dawns on us that maybe we need to examine and change what we believe and how we think.
Companies on the verge of Chapter 11 filing are probably swamped by so many urgent issues that a strategic revamp is low on the list of priorities. They are dealing most critically with the ability to buy merchandise, retain managers, pay rent and make their payrolls. Of course, you can make the argument that the lack of a strategic plan (pertaining to merchandising, store expansion, financials, etc.) led many of these companies to Chapter 11 in the first place.
The rush to file and submit a reorganization plan quickly may not allow troubled retailers the luxury of time that Chapter 11 can provide. Mervyns is a good example of a retailer that has gotten its DIP financing in place and now needs to rethink what put it into bankruptcy in the first place.
Because they can’t see the forest for the trees! Companies riddled with internal politics, one upmanship, and many other non-productive processes and procedures, will point to marketing as the demise and cause of bankruptcy!
Companies need to examine their internal procedures and cost holistically and react with positive new efficient processes. Cost reductions and better customer service can help avoid bankruptcy. Changing your logo or your name doesn’t fix problems. It’s like changing one band-aid for another. A complete cleanse from the ground up or better yet, top down (much like a body cleanse) will relieve many companies of all the toxic waste. Stamp out politics, it’s a bacteria that will kill ever so slowly.
The bankruptcies tend to be managed by financial people who have been brought into a company specifically to manage the Chapter 11 filing. These financial experts are great at crunching numbers, slashing payroll costs, and cutting customer service to a level of bare bones operations. Their experience in retailing, customer service, branding, etc, is limited, and their results are indicative of this. Hence the failure when these companies come out of bankruptcy.
For retailers to truly be successful, it is not about reorganizing their finances, it is more about reorganizing their corporate culture. Only then will the retailers emerge from Chapter 11 with a better chance of success.
One of the primary reasons companies fail, from my experience and observation, is a culture of adherence to a set way of doing things that is not reflective of or responsive to the broader competitive environment. Organizations, like people, tend to settle into comfortable, predictable ways of doing things and thinking about things. Even in the most dynamic organizations there always seem to be sacred cows. When those sacred cows leave an organization blind or paralyzed to imminent competitive danger, the slide inevitably begins.
Even in bankruptcy, after the company has failed, it is often difficult to dislodge those sacred cows, to re-invigorate the organization and convert it from sleepy into nimble. And by then, their customers have often left them by the wayside as well.
Today’s selections of discussions are particularly interesting and particularly related. Consider:
*How is it…there are so many examples of retailers failing in this [speed of customer service] area?
*What are the reasons…there is not more participation in standards organizations?
*Why do so many retailers that file under Chapter 11 FAIL TO SEE WHAT NEEDS FIXING…?
I have found that retailers often give lip service to what they find and know about their businesses, but are so ingrained with the merchant philosophy that elements outside of directly moving a product off the shelf are secondary. My experience indicates that there is only one retailer in the U.S. that sees their business as a complete system of moving goods to the consumer at an efficient cost: Walmart.
Make a presentation to a buyer in any retail channel. They talk about the metrics that are necessary for a new item, but then they go back to the old way of operating. These include demanding stocking fees, demanding promotional fees, extending payments beyond any reasonable time, taking deductions often that have no rational. They promote items that are not price sensitive. They focus on price reductions rather than turn business.
Walmart’s success is not predicated on their size. It is predicated on how they see their business. It is the understanding of the synthesis of their business that permitted them to grow to their current dominance. Retailers in all channels must start to see their businesses in this manner.
Good points, all. One other factor: Rubber-stamp boards of directors who become good-old-boy clubs instead of doing their jobs and making the tough calls.
The problem is management’s inability or downright refusal to make real changes in the business. When faced with decreasing sales, declining profits and lower traffic in stores some retail companies resort to “band aid” solutions to fix the problems. And they often wait too long to fix things or make real changes in how they do business.
For retailers that thrive, effective management teams are constantly working to improve and fine tune their businesses in every economic environment. These same management teams are willing and able to make tough decisions and real changes in their business when faced with a tough economy and declining store traffic. Growth is measured and carefully planned. Stores that fail to perform over an extended period of time are fixed, moved or closed. Costs are constantly analyzed and kept to an absolute minimum.
Like a previous contributor stated, growing too fast can be the catalyst for failure. But incompetent management can also lead to bankruptcy. For retail companies that have been in business for many years, it is a real tragedy. The sad thing is, there are ways to avoid bankruptcy but steps must be taken well before that occurs.
Most companies fail because of a disconnect between their customers and the company. Whether this is product, pricing or customer service-based, it first needs to be realized, then a solution needs to be recognized and implemented. Seeing this forest through the trees, especially in an environment of concern about the future, and the viability of the organization as a whole is a difficult situation to implement.
Add to this the existence of the same management leading the organization that was in place prior to the bankruptcy, and you have a difficult mix. Most reorganizations would be better off if they first changed their leadership, then, implemented a simple plan of efficiencies, customer service priority and appropriate product pricing.
Speaking as one of the hundreds of corporate staffers at the Southland Corporation (7-Eleven stores) who were laid off during our panicked LBO in the late 80s, I do know that our leveraging turned out to be unnecessary, ill-advised, poorly planned and executed, with decidedly unattractive terms. Yet, we persisted. Understanding that it was the unreasoned fear of a rumored greenmail threat that really drove the LBO, and that the LBO drove the bankruptcy, many speculate that the Chapter 11 would never have been necessary without the LBO. Internally we were already on the path to “a huge philosophical shift,” with kudos to John Antiocho and others. In other words, we knew what changes were needed well before the bankruptcy.
Occasionally we see bankruptcies for what might be called “technical” reasons: e.g. the business operations themselves are cash positive, but the companies are over-leveraged and can’t cover their interest payments. Presumably this is “fixable” but if your basic operation isn’t working, there’s probably not much hope.
They got flabby, lazy, too big and uncontrolled in the good times, lost focus and then it was too late. They lost sight of the basics: buy well, sell well, focus on everything non value generating and get rid of it and relate to the customer well. Too much is broken at bankruptcy and it becomes slash and burn.
There is much said about organising companies into maximum sized, 150 people business units, for the obvious control and influence reasons.
It is tricky to be dynamic when you are weighed down with slow decision making, personal agendas and dislocation between the board and customers.
It’s hard to become successful again when you were not successful to begin with, or the success was decades ago.
From my experience, bankruptcies result from two issues. First is from rapid expansion. Their concept is successful in a few locations so they think it will be successful everywhere. Krispy Kreme is a good example, although I don’t think they have filed bankruptcy yet. An offshoot of that is sometimes when companies are facing tough times they think the best solution is to just build or acquire more stores. The other issue is executives in denial. They think competitors such as Walmart are a fad and will go away. Retailers are run by people and people are not perfect. They have egos, they have pride, and they make mistakes.
Best thing to do is differentiate from the big gun stores and hope your selection and pricing is enough to win customers. Here in Canada, since Walmart came in the mid-90s, every dept store and mass merchant has declined big time. WM is expanding and always jammed packed. Competing against them is pointless.
What some stores, buyers or customers don’t understand is that WM wins because they usually sell their stuff for lower margins. They also have a pretty liberal return policy. In my experience at various companies (all selling to WM of course), WM’s price cost is really no different than any other small or large account, BUT their buyers retail the goods at a 5%+ lower margin for them vs what other stores sell it for.
On the other hand, all those fancy specialty stores like Future Shop/Best Buy and tons of chic clothing stores and such all seem to be doing very well. They focus on certain products and have huge selection. Pricing isn’t even that great all the time, but it’s all about the products.
Choose your poison. Mass or niche? Breadth vs. depth?
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In organizational performance, any gap between a desired circumstance and the actual circumstance can be attributed primarily to mindset. It is amazing to me how many times the Universe has to put us through the wringer before it dawns on us that maybe we need to examine and change what we believe and how we think.
Companies on the verge of Chapter 11 filing are probably swamped by so many urgent issues that a strategic revamp is low on the list of priorities. They are dealing most critically with the ability to buy merchandise, retain managers, pay rent and make their payrolls. Of course, you can make the argument that the lack of a strategic plan (pertaining to merchandising, store expansion, financials, etc.) led many of these companies to Chapter 11 in the first place.
The rush to file and submit a reorganization plan quickly may not allow troubled retailers the luxury of time that Chapter 11 can provide. Mervyns is a good example of a retailer that has gotten its DIP financing in place and now needs to rethink what put it into bankruptcy in the first place.
Because they can’t see the forest for the trees! Companies riddled with internal politics, one upmanship, and many other non-productive processes and procedures, will point to marketing as the demise and cause of bankruptcy!
Companies need to examine their internal procedures and cost holistically and react with positive new efficient processes. Cost reductions and better customer service can help avoid bankruptcy. Changing your logo or your name doesn’t fix problems. It’s like changing one band-aid for another. A complete cleanse from the ground up or better yet, top down (much like a body cleanse) will relieve many companies of all the toxic waste. Stamp out politics, it’s a bacteria that will kill ever so slowly.
The bankruptcies tend to be managed by financial people who have been brought into a company specifically to manage the Chapter 11 filing. These financial experts are great at crunching numbers, slashing payroll costs, and cutting customer service to a level of bare bones operations. Their experience in retailing, customer service, branding, etc, is limited, and their results are indicative of this. Hence the failure when these companies come out of bankruptcy.
For retailers to truly be successful, it is not about reorganizing their finances, it is more about reorganizing their corporate culture. Only then will the retailers emerge from Chapter 11 with a better chance of success.
One of the primary reasons companies fail, from my experience and observation, is a culture of adherence to a set way of doing things that is not reflective of or responsive to the broader competitive environment. Organizations, like people, tend to settle into comfortable, predictable ways of doing things and thinking about things. Even in the most dynamic organizations there always seem to be sacred cows. When those sacred cows leave an organization blind or paralyzed to imminent competitive danger, the slide inevitably begins.
Even in bankruptcy, after the company has failed, it is often difficult to dislodge those sacred cows, to re-invigorate the organization and convert it from sleepy into nimble. And by then, their customers have often left them by the wayside as well.
Today’s selections of discussions are particularly interesting and particularly related. Consider:
*How is it…there are so many examples of retailers failing in this [speed of customer service] area?
*What are the reasons…there is not more participation in standards organizations?
*Why do so many retailers that file under Chapter 11 FAIL TO SEE WHAT NEEDS FIXING…?
I have found that retailers often give lip service to what they find and know about their businesses, but are so ingrained with the merchant philosophy that elements outside of directly moving a product off the shelf are secondary. My experience indicates that there is only one retailer in the U.S. that sees their business as a complete system of moving goods to the consumer at an efficient cost: Walmart.
Make a presentation to a buyer in any retail channel. They talk about the metrics that are necessary for a new item, but then they go back to the old way of operating. These include demanding stocking fees, demanding promotional fees, extending payments beyond any reasonable time, taking deductions often that have no rational. They promote items that are not price sensitive. They focus on price reductions rather than turn business.
Walmart’s success is not predicated on their size. It is predicated on how they see their business. It is the understanding of the synthesis of their business that permitted them to grow to their current dominance. Retailers in all channels must start to see their businesses in this manner.
Good points, all. One other factor: Rubber-stamp boards of directors who become good-old-boy clubs instead of doing their jobs and making the tough calls.
The problem is management’s inability or downright refusal to make real changes in the business. When faced with decreasing sales, declining profits and lower traffic in stores some retail companies resort to “band aid” solutions to fix the problems. And they often wait too long to fix things or make real changes in how they do business.
For retailers that thrive, effective management teams are constantly working to improve and fine tune their businesses in every economic environment. These same management teams are willing and able to make tough decisions and real changes in their business when faced with a tough economy and declining store traffic. Growth is measured and carefully planned. Stores that fail to perform over an extended period of time are fixed, moved or closed. Costs are constantly analyzed and kept to an absolute minimum.
Like a previous contributor stated, growing too fast can be the catalyst for failure. But incompetent management can also lead to bankruptcy. For retail companies that have been in business for many years, it is a real tragedy. The sad thing is, there are ways to avoid bankruptcy but steps must be taken well before that occurs.
Most companies fail because of a disconnect between their customers and the company. Whether this is product, pricing or customer service-based, it first needs to be realized, then a solution needs to be recognized and implemented. Seeing this forest through the trees, especially in an environment of concern about the future, and the viability of the organization as a whole is a difficult situation to implement.
Add to this the existence of the same management leading the organization that was in place prior to the bankruptcy, and you have a difficult mix. Most reorganizations would be better off if they first changed their leadership, then, implemented a simple plan of efficiencies, customer service priority and appropriate product pricing.
Speaking as one of the hundreds of corporate staffers at the Southland Corporation (7-Eleven stores) who were laid off during our panicked LBO in the late 80s, I do know that our leveraging turned out to be unnecessary, ill-advised, poorly planned and executed, with decidedly unattractive terms. Yet, we persisted. Understanding that it was the unreasoned fear of a rumored greenmail threat that really drove the LBO, and that the LBO drove the bankruptcy, many speculate that the Chapter 11 would never have been necessary without the LBO. Internally we were already on the path to “a huge philosophical shift,” with kudos to John Antiocho and others. In other words, we knew what changes were needed well before the bankruptcy.
Occasionally we see bankruptcies for what might be called “technical” reasons: e.g. the business operations themselves are cash positive, but the companies are over-leveraged and can’t cover their interest payments. Presumably this is “fixable” but if your basic operation isn’t working, there’s probably not much hope.
They got flabby, lazy, too big and uncontrolled in the good times, lost focus and then it was too late. They lost sight of the basics: buy well, sell well, focus on everything non value generating and get rid of it and relate to the customer well. Too much is broken at bankruptcy and it becomes slash and burn.
There is much said about organising companies into maximum sized, 150 people business units, for the obvious control and influence reasons.
It is tricky to be dynamic when you are weighed down with slow decision making, personal agendas and dislocation between the board and customers.
It’s hard to become successful again when you were not successful to begin with, or the success was decades ago.
From my experience, bankruptcies result from two issues. First is from rapid expansion. Their concept is successful in a few locations so they think it will be successful everywhere. Krispy Kreme is a good example, although I don’t think they have filed bankruptcy yet. An offshoot of that is sometimes when companies are facing tough times they think the best solution is to just build or acquire more stores. The other issue is executives in denial. They think competitors such as Walmart are a fad and will go away. Retailers are run by people and people are not perfect. They have egos, they have pride, and they make mistakes.
Best thing to do is differentiate from the big gun stores and hope your selection and pricing is enough to win customers. Here in Canada, since Walmart came in the mid-90s, every dept store and mass merchant has declined big time. WM is expanding and always jammed packed. Competing against them is pointless.
What some stores, buyers or customers don’t understand is that WM wins because they usually sell their stuff for lower margins. They also have a pretty liberal return policy. In my experience at various companies (all selling to WM of course), WM’s price cost is really no different than any other small or large account, BUT their buyers retail the goods at a 5%+ lower margin for them vs what other stores sell it for.
On the other hand, all those fancy specialty stores like Future Shop/Best Buy and tons of chic clothing stores and such all seem to be doing very well. They focus on certain products and have huge selection. Pricing isn’t even that great all the time, but it’s all about the products.
Choose your poison. Mass or niche? Breadth vs. depth?