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Retail Bankruptcy in a Changing Society

Jeremi Karnell
Dec 4, 2017

It's no secret that many retail stores are struggling. In 2017, more businesses may end up closing than during the Great Depression. Analysts predict that 25 percent of this country's shopping malls will close within the next five years. The course to bankruptcy is expected to continue, as many businesses gamble with leveraged buyouts.

There are also several other factors contributing to this alarming trend. The economy and the way consumers shop has changed. Customer needs and expectations have also changed. This may signal a shift in American values.

Supply Exceeds Demand

Many retailers expanded in the years preceding the recession of 2006. With so many companies expanding their reach at the same time, there is more retailer competition than consumer demand. With more shopping options, there are not enough customers to keep all of the businesses profitable.

Online Competition

Competition is competition. Retailers are not only competing in an overly saturated physical market, but they are also competing with online shopping. Today, 80% of the US population shops online; that compares to only 22% in 2000. Customers want the most value for their money and have easy access to online comparisons. Companies are struggling to keep prices competitive. When companies like Amazon offer products from a multitude of sources, the in-store selection seems limited.

Loss of Confidence

Closing stores can be a favorable choice with investors. Without lower performing locations, a company will increase its profitability. The general public does not rationalize that side of the business. Society sees expansion as good and down-sizing as bad. Consumers tend to lose faith in a once popular chain when they hear of locations closing. They may start to doubt the relevance of the business and may not trust that the company will be able to provide service after a sale. These customers decide which businesses survive, and may resist shopping with a company that is downsizing.

The Leveraged Buyout

Some companies folding this year are businesses that had been previously purchased by private equity companies in a leveraged buyout. Some equity firms will search for struggling businesses to target. An equity firm buys the struggling company for a small percentage of the selling price. The equity firm then secures a loan for the amount of the remaining purchase price. The equity company is in a win-win situation for the following reasons:

  • An equity firm has nothing to lose if the company filing for bankruptcy is unsuccessful in restructuring.
  • Equity firms put their own management team in place
  • Struggling companies pay a consulting fee for management services
  • Struggling companies are responsible for paying the business loan

The company purchased is often unable to keep up with the demands of high-interest rates and the added expense of the consulting fee. Often, they are unable to invest in areas of operation that could keep them current, like improving their online appeal.

Unable to continue with their own course of action, the purchased company is required to uphold the demands of the equity firm. As a condition of the leveraged buyout, they are often forced to comply with the following conditions:

  • Restructuring operations to cut expenditures
  • Eliminating non-essential personnel at all levels
  • Liquidating locations to generate cash and pay creditors

Some companies can bounce back after a leveraged buyout. If the restructuring is successful, the private equity company will sell the business back to the shareholders within a few years. If the restructuring is unsuccessful, the bank issuing the loan is often the first creditor to be paid during liquidation.

Screen Time

Internet shopping is not the only reason that our computer time is limiting the success of the retail store. Consumers spend a lot more time in front of computer screens, and so do their children. This trend is particularly hurtful to retailers selling toys and games. Kids are not devoting as much of their free-time playing with trucks, games and baby dolls as their grandparents and parents did when they were young. Interactive games and videos may be keeping kids out of the playroom.

Parenting styles have also changed. Nearly 30 percent of parents surveyed with children under the age of 18 felt it would be almost impossible to raise a child without television. Of the older parents, those 50-65, only 15 percent felt that it would have been nearly impossible to raise children without a TV. Parents are more willing to encourage, or at least give in to, television viewing as a parenting tool.

Changes in Consumer Values

In the years of retail expansion, consumers were happy to purchase products that were produced in large quantities and carried a global appeal. Customers were buying products that represented prestige and social status.

Current shoppers do not seem as interested in prestige and social status as their parents and grandparents. These consumers are looking for more products that are sourced locally. They want to purchase from ethical companies that offer fair wages through every level of the manufacturing process. They lean towards products that are eco-friendly, produced by companies run in an ecologically responsible way.

Many of today's shoppers prefer to support the artisan rather than products of mass production. With the popularity of internet shopping, consumers have easy access to handcrafted merchandise. 72% of millennials are more willing to spend their money on experiences and spend less of their income on material possessions.

The Domino Effect

In today's market, when a large company starts closing unprofitable locations, it is usually a sign that they plan on shifting their focus towards their online presence and boost their internet sales. When too many retailers abandon a local shopping area, it negatively affects the revenue of the shops that are left behind. With fewer shopping options, fewer customers are attracted to the area. The business left standing sees fewer customers. Business slows.

Retail trends have not all been negative. Discount stores and dollar stores are growing and expanding. The number of customers shopping with discount retailers increased at the start of the recession. These shoppers have not returned to higher priced brands since the economy began its recovery.

Not all retailers currently in crisis will vanish. Filing for bankruptcy gives a business an opportunity to restructure and regroup. Old-school retailers are embracing technology and revamping their business models. Mall owners are learning to provide experiences, as well as merchandise, to attract potential shoppers. Consumers will still purchase in stores, still want to view products before buying and cannot always wait for purchases to be delivered. Consumers still want the option of face-to-face customer service.

More articles related to: Industry Trends








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