Bouncing Back from Bankruptcy: Today’s Retail Reality

Trips to traditional stores are becoming history as retail store crowds slim, doors close, and chains go bankrupt. BCBG Max Azria, Toys R Us, True Religion Apparel, Payless Shoe Source, and Radio Shack, among other retail giants, have suffered this year with a combined closing of more than 6,700 U.S. stores since January 1st, 2017. This has resulted in a record number of store closings greater than any other year, according to CNN Money. Among the biggest traditional retail names, these retailers have each filed for chapter 11 bankruptcy this year. Despite significantly slow in-store sales over the past few years, big retail bankruptcies have come as a shock and may have just begun.

This year’s Black Friday, notably the busiest shopping day of the year, marked a shift in consumer purchases, as traditional brick and mortar retail continues to decline. According to CNN Money, while American shoppers spent a record of $5 billion in 24 hours this year, compared to Black Friday 2016, online shopping marked a 16.9% increase in dollars spent online. Black Friday in-store visits have declined by 4% since last year, according to in-store video analyses conducted by RetailNext Inc., while online purchases have simultaneously increased by 18% since last year, according to software company Adobe Systems Inc.

Changing consumer habits have given way to the booming online retail industry, forcing traditional retail to shift how they sell their inventory. BCBG Max Azria Group Inc. has struggled to remain afloat during this transition, ultimately filing for bankruptcy in March, in what was the third attempt to save the company, according to Bloomberg. Founded in 1989, the fashion brand’s cocktail dresses and handbags have been popular among red-carpet celebrities. Last August, Azria, the founder of the business, surrendered his equity stake and left the company. “Like many other apparel and retail companies, BCBG has fallen victim in recent years to adverse macro trends, including a general shift away from brick and mortar to online retail channels, a shift in consumer demographics away from branded apparel,” former Chief Restructuring Officer of BCBG Holly Felder Etlin said. BCBG has filed for bankruptcy due to its overwhelming debt load, with which the company owed about $459 million to lenders. According to Biz Journals, the company’s acting interim chief executive optimistically noted that the chapter 11 filing would further aid “overall strategy while we explore opportunities to recapitalize the company and profitably expand.”

There’s no question that the explosion of online toy shopping forced Toys R Us into bankruptcy this past September. According to CBS News, the company’s heavy debt load from a $6.6 billion leveraged buyout by private equity firms Bain Capital and KKR & Co. in 2005 led to its bankruptcy. The purpose of the deal was to improve the in-store shopping experience. Nonetheless, it ultimately limited Toys R Us from investing in e-commerce and competing in the online retail industry sector. Furthermore, according to Bloomberg, children toy preferences have shifted to the online marketplace of ample digital gadgets and toys that Toys R Us has failed to keep up with. Lego, the toy building-block maker, has witnessed its first sales decline in 13 years, mainly credited to the shift of preferences to online apps, games, and gadgets. Finally, with speculation that Toys R Us would go bankrupt, according to CBS News, almost 40% of international and domestic Toys R Us suppliers grew nervous, lost confidence in Toys R Us, and demanded cash up front. Like BCBG, Toys R Us has hoped that the bankruptcy will enable restructuring so that Toys R Us can pursue long-term growth. It aims to capitalize on bankruptcy relief with plans to close less profitable stores, invest in remaining locations, and keep up with competition. On another note, last week the U.S. trustee in the Toys R Us bankruptcy case filed an objection to Toys R Us’ attempt to pay company bonuses to its executives to encourage them to remain with the company. According to the Wall Street Journal, the bonuses included a $2.8 million payment to CEO Dave Brandon. It seems that Toys R Us has a long way to go to return to its original status as a successful toy retailer.

The ever-expanding online retailer, Amazon, as well as other e-commerce players, have cornered the retail market and have dominated the industry, catering to the greater convenience of buying online. According to Forbes, Wal-Mart has entered the e-commerce playing field, which has accounted for only around 3% of its total revenue so far. Along with many other traditional brick and mortar companies, Wal-Mart has invested tremendously in e-commerce growth. Forbes expects Wal-Mart to neutralize its brick and mortar retail locations and projects the company’s total U.S. e-commerce sales to reach $523 billion by 2020 from $395 billion in 2016. Wal-Mart and Amazon have slashed product prices as they can afford to do so, while companies like Toys R Us have struggled to compete or match prices primarily with debt being such a tremendous burden. Interestingly, Amazon has made it difficult for competitor retailers to match its prices to prioritize customers by blocking price-tracking technology, as the Wall Street Journal points out.

The shift to online purchasing, slimming in-store customer crowds, has harbored incentives for traditional retailers to reinvent in-store shopping customer experiences. Macy’s has organized fashion shows and its well-known flower show to attract customers to its physical stores. Armani has invested in designing its stores like hotel lobbies to position itself with the attributes of comfort and architecturally modern. Other companies have upgraded stores via technology. Marks & Spencer has added touch screens, digital devices, and video walls to showcase the latest clothing trends and home goods to consumers who shop at their brick and mortar locations. Nike stores now include fitness lounges and small-scale basketball courts, soccer fields, and running tracks with built-in digital sensors, where customers can try out these new features and gain real-time feedback on their  “training” time. Nike also periodically brings athletic stars to its retail locations to attract consumers. Best Buy and Wal-Mart exercised similar tactics this Black Friday. According to the Wall Street Journal, while Best Buy Co. withheld some deals from its website and only offered exclusive products and special sales in stores, Wal-Mart also advertised its deals and discounted products differently for its stores than its online site.

As big-box traditional retailers deal with financial troubles, others have found strategies to compete and succeed. By entering the world of e-commerce or creatively attracting consumers to their stores, it seems that retailers have been finding new ways to keep up with competition and thrive. In a Darwinian series of events, it seems that retailers are dealing with a “survival of the fittest” transition. Those with recognizable brands and unique store experiences will continue to attract customers, while those that fail to keep up will be forgotten. The dominance of Amazon, however, is making retail life even harder. The possibility remains that traditional retailers may invest in expanding to e-commerce and may utilize brick and mortar locations and warehouse space as distribution centers to imitate Amazon’s success as it is doing with the present Whole Foods acquisition. The decline of traditional retail and the simultaneous domination of online retail justifies the conclusion that the consumer preference shift will eliminate many retailers and advance others who wish to compete and thrive in the future. According to CNN Money, this holiday season is crucial for overall retail and for the economy because around 30-40 percent of annual retail sales occur between Black Friday and Christmas. Only time will tell if traditional retailers set themselves up to bounce back from heavy debt loads and declining sales, and share in the retail success of one of the largest consumer-focused societies in history.