Journal of Corporate Renewal

October

2015

NO LETUP IN SIGHT

for Retailers'

Tough Times

BY MARGARET BOGENRIEF, PARTNER, ACM PARTNERS

retailers—thereby forcing retailers to adapt to the “fast fashion” model, as exemplified by Uniqlo and Zara— but it has also forced the general retail industry to focus spending and labor on developing fast-paced, technology-based advertising, manufacturing, and distribution.

• Technology. The shift in technology-based consumer behavior has also led to a dramatic increase in e-commerce purchases at the expense of brick-and-mortar stores. 7 E-commerce sales were up 14. 5 percent in Q1 2015 from Q1 2014, driven by industry leader Amazon, 8 which topped the list in 2014 at nearly $79.5 billion. The top 500 U.S. merchants grew their combined sales 16. 2 percent, to $256.3 billion, in 2014. That was more than six times the growth rate for all other U.S. retail sales, including stores, catalogs, and TV infomercials and other forms of direct marketing, which increased 2. 4 percent, to nearly $2.9 trillion.

Meanwhile, in-store sales grew by only 3 percent. Overall, according to the U.S. Department of Commerce, the U.S. e-commerce market grew 15. 4 percent to $304.9 billion.

Market Dynamics

To many in the turnaround industry, it has been evident for some time that 2015 would be a difficult year for the retail industry. As early as 2012, with headlines detailing the distress at JCPenney, 2 including the retailer’s refinancing in June 2014; 3 American Apparel’s4 marketing, leadership, and financing woes; and GAP Inc.’s5 struggle to occupy the retail niche between Banana Republic and Old Navy (including 175 store closures), retailers across the market spectrum have appeared to be set for trouble.

The first question when identifying specific industry distress is always: what market and sector forces are driving the crisis? Within the retail industry, the reasons are as varied and myopic as retailers themselves and include:

• Consumer Spending Habits. Broadly speaking, consumer spending habits have shifted significantly over the past decade. Millennials, 6 in particular, are altering the retail landscape by changing the focus of their spending from apparel to high-end electronics. Not only has this resulted in fewer dollars being spent at traditional apparel

As many in the turnaround and istressed space know, the total number of bankruptcy filings continues to languish. In Q1 2015, business bankruptcy filings were down more than 3 percent from Q4 2014 and

19 percent from Q1 2014.1 In fact, Q1

2015’s filing count continues to mirror the lowest business bankruptcy total since 2006, when filings dramatically increased as the U.S. slid into recession beginning in December 2007.

The decline in overall business bankruptcies is more easily understood when considered within the context of continuing low interest rates for business borrowers that, when combined with perceived elevated costs associated with a bankruptcy filing, make the Chapter 11 option unappealing.

Within this business climate, however, troubled retailers appear to be bucking this declining trend.

This article discusses market trends that are driving more retailers to distress, what barriers exist to reorganizing and turning around a retailer, and why quick and immediate advisory action is necessary to rescue a retailer in trouble.