Whats driving increased pace of retail chain bankruptcies in 2017?
Retail growth has been resurgent recently with near-full employment, ease of accessibility of products through e-commerce and seamless payment options offered across the industry. However, peeling within the surface shows the sign of trouble for traditional brick-and-mortar stores. 2016 saw the closing of 4000+ stores and bankruptcies of several major retailers and first quarter of 2017 further accelerated this trend with 10+ retailers filling for bankruptcies. The trend is is clearly evident from following table listing the timeline of retail bankruptcies:
|Mar 2017||HHGregg||Appliances||Close 88 of 220 stores, 3 DCs, cut 1,500 jobs|
|Mar 2017||Gordmans||Department store||Presence in 22 states with 99 stores - filed bankruptcy|
|Mar 2017||Neiman Marcus||Luxury retailer||Yet to file for bankruptcy, restructuring $4 Bn debt|
|Mar 2017||Radio Shack||Electronics retailer||Closing 200 of its 1,500 stores|
|Mar 2017||BCBG||Fashion retailer||Started closing 120 of its stores in January|
|Feb 2017||Payless Shoes||Footwear||Working on restructuring plan to close 1000 stores (rumor)|
|Feb 2017||MC Sports||Sporting goods||Impacted by migration of sales to online resellers|
|Feb 2017||Eastern Outfitters||Discount & Outdoor||Parent Bob’s Stores & Eastern Mountain Sports|
|Feb 2017||Limited||Women’s apparel||Closed all 250 stores|
|Feb 2017||American Apparel||Fashion||Second bankruptcy filing, closing 110 retail stores|
|Feb 2017||Wet Seal||Teen Apparel||Unable to find a buyer and auctioning properties|
|Jan 2017||Bibhu Mohapatra||Fashion||Restructuring its debt for offering second collection|
|Dec 2016||Yogasmoga||Athletic apparel||Closed all of its stores except one and continuing online presence|
|May 2016||Aeropostale||Fashion||Only 229 stores remain open of 800+|
|Mar 2016||Sports Authority||Sporting goods||Acquired in June 2016 by Dick’s Sporting Goods|
|Jan 2016||Joyce Leslie||Women's Aaparel||Closed all stores after 65 years of operations|
If the retail industry is booming, why increase in retail bankruptcies?
The common theme of the surging retail bankruptcies seems to be booming online retailing business, led by the likes of Amazon. Sporting goods retailers, such as Sporting Chalet & Sports Authority, have been strongly impacted by online re-sellers, as most of the products require least amount of personal selling, and consumers are comfortable making purchases through online stores. Similarly, footwear retailers, such as Finishline and Payless, are facing the heat of burgeoning cost of maintaining retail presence and change in consumer preferences making significant part of their inventories obsolete. The other retailers which are at high risk include Toys & Baby product retailers such as Toys R Us, specially with availability of faster delivery enabling consumers to satiate the immediate needs (in case of children being the end consumers).
Another reason of sudden increase of retailers going out of business is the increasing financial costs. Most of the retailers have heavy debts due and require high working capital, a big chunk of which is in inventory. With increasing interest rates in Q1 2017, and a forecast of 2 more upcoming increases in 2017, the cost of servicing debt will surge substantially. Retailers such as Sears, Claire’s Stores, Rue21 have high debt and would be top contenders in 2017 for potential bankruptcies.
If the retail growth is stable, then where is the market share going?
In the environment of social media campaigns (trigger), mobile technology (accessibility) coupled with paperless payment modes and same day deliveries (enablers), consumers have got accustomed to immediate satisfaction of converting have-nots to wants, and wants to needs, and needs to haves. The biggest contributor for the retail growth in recent times has been rise of Amazon and similar e-commerce giants such as E-bay, Alibaba, Flipkart etc. A snapshot of Amazon’s revenue growth itself provides an idea of how it has taken the lead in the industry:
Since 2005, Amazon has seen increasing revenue growth every year (average of over 25%) while the US retail industry by contrast grew ~3.5% per year:
As per the industry estimates, the percentage of retail sales from e-commerce has increased from 7% in 2012 to 11% in 2016, and is forecasted to gain further momentum in next few years as the consumer is moving to even more convenient consumption mechanisms (voice based orders through virtual assistants).
How could traditional retail stores survive the digital transition?
With changing consumer preferences and stiff competition from online retailers, brick and retail mortar retailers have only 2 choices- adapt or close the shutters. Decision broadly depends on how established brand name is and how loyal customer base it commands. Following are a few steps which have proven pivotal in enabling turnaround for some retailers:
- Reduce physical footprint – The first step to be able to remain financially viable is to reduce the working capital needs and cut down non-performing \ redundant locations. Typically every store location needs to be evaluated on a scale of cost vs utility (financial performance, competitor positioning, consumer loyalty, proximity to other stores), and a score needs to be assigned to each store based on factorial analysis of each parameter. Through this quantitative analysis, it becomes a matter of change management and internal restructuring to bring down the number of stores with least reduction on the top line and most impact to the bottom line.
- Establish or increase digital presence – Increased investment in mobile sites \ apps \ games, e-commerce and social campaigning goes hand in hand with reduction in retail stores. With reduced physical presence in market, having a strong digital presence would result in less impact to the brand’s presence in the consumer’s mind share and could even improve competitive positioning of the brand name. Also at this time, it is very essential for the remaining store locations to be promoter of brand’s digital presence. One such example is to enable store executives to place orders for in-store customers if the inventory is out-of-stock and offer free delivery \ store pickup. Other example could be to give a % discount \ free shipping to an in-store customer for next online purchase.
- Engage consumers through digital marketing – Digital marketing has proven to be a highly cost effective and most impactful marketing tool in today’s era. Throughout the turnaround of the company’s retail to digital transition, it is crucial to communicate effectively with consumers utilizing social channels such as Facebook, Twitter, Pinterest, Instagram. Awareness campaign should be executed to ensure that consumers know that their favorite brand is not disappearing in thin air and rather transforming to be more engaged with them. Promotion campaigns should be undertaken to provide loyal customers attractive discounts in order for them to be inclined to participate in the turnaround of the transition, by spreading word of mouth (think T-Mobile Tuesdays, which provides customers gifts for their near and dear ones). Gaining a new customer is 7 times harder than retaining an existing one, and that should be prime focus of digital marketing in this transition period.
- Evaluate debt restructuring – With increasing interest rates, the amount to service the loans is bound to increase, resulting in even more pressure on limited working capital. Debt restructuring could help in re-negotiating the outstanding loan and remain viable in the times of this transition.
Aeropostale is a prime example of this strategy, which has reduced the physical presence but increased digital presence tremendously. Walmart is another mega-retailer which has had stagnant in-store revenues, but has started to see uptrend in the e-commerce sales (from previous declining trend).
Hanging up shoes is easy in times of adversity, but with right leadership and proper guidance, a turnaround is not out of question.