Navigating the Retail Meltdown

ThinkstockPhotos 576896768The retail sector is hurting due to the growth of e-commerce, decreased spending on consumer goods, and high debt levels following "going-private" transactions, among others. By Jeffrey M. Pomerance, Esq.

The facts are undeniable. According to Credit Suisse, between 20 and 25 percent of the nation's shopping malls will close in the next 5 years. Established retailers such as Macy's, JC Penney and Sears have announced numerous store closings; clothiers such as American Apparel, Gymboree and Wet Seal have filed for bankruptcy relief, with more on the way. In fact, the number of companies filing Chapter 11 bankruptcy cases, especially in the retail space, is approaching the highest level since 2008.

The retail sector is hurting, with no immediate end in sight. The causes are many—the growth of e-commerce, decreased spending (as a percentage of total spending) on consumer goods, high debt levels following "going-private" transactions, among others. All hope is not lost, however, as brick-and-mortar companies such as Best Buy demonstrate that retailers can implement a number of strategies to not only survive the meltdown but actually thrive and grow.

Recognize Your Competitive Advantage

Too often, retailers view their brick-and-mortar establishments as merely a cost and detrimental when competing with Amazon and other e-commerce giants who have traditionally offered lower prices to garner market share. Successful retailers such as Best Buy, however, recognize that physical stores, when part of a multichannel effort to generate sales, allow potential buyers the ability to feel and touch products that online retailers are unable to offer.

Customers generally like to ask questions, and prefer to speak directly with a person rather than through a call center or via email. Retailers with brick-and-mortar locations can offer entertainment (either in store or within reasonable proximity) and an experience that cannot be achieved online. Make the shopping an experience that satisfies a client's desire for items and an enjoyable time, and not just the acquisition of goods.

"Servicize" Your Products

Along these lines, brick-and-mortar retailers should seek to provide complementary and supplementary services and support for product sales, which not only enhance the purchase process but can actually generate sales of new products. Best Buy, for example, also offers in-house advisory services through its Geek Squad support function, which generates additional revenues, enhances the customer experience and may in fact lead to new product sales.

Manage Cash Effectively

Too often, retailers seek to regain their footing simply by cutting costs. This is shortsighted and can lead to further problems. Rather, the goal should be to conserve cash by managing it effectively. Reliance on the ability to secure a competitive line of credit, even at a time with historically low interest rates, or seeking additional outside financing in today's market has led many retailers to incur exorbitant levels of debt and subject to large interest payments that result in competitive problems.

Rather, care should be taken to ensure that the appropriate available funds are set aside for creative marketing and advertising, both traditional and online, and for the education and training of the retailer's sales force. To the extent possible, inventory should be obtained on consignment or on account to best manage cash outflows.

Revisit The Company's Capital Structure

Since 2008, many retailers have incurred or been saddled with significant debt, which can significantly hamper a retailer's ability to compete in the present retail environment. Along the lines mentioned above, managing cash is a key determinant in financial viability. Management should be examining their balance sheet and cash flows, and seek if possible to align debt holders with the company's long-term goals. This can occur either on a consensual basis (as in a reorganization of debt to equity) or through the bankruptcy process. Too often, the cash that is used to make interest payments is the cash that, if properly applied, would permit a retailer to successfully perform in a tough retail environment.

Manage Inventory Effectively

Successful retailers offer a good product mix to effectively meet market demand, yet balance the amount of inventory on hand—an intelligent warehousing and distribution strategy can significantly enhance profitability. Best Buy, for example, replaced CD's and DVD's with other more profitable electronic items.

Revisit Your Lease

The significant dislocation in the retail sector permits opportunities to revisit and renegotiate terms. Care should be taken in this regard; landlords concerned about the retail meltdown may view a renegotiation as an opportunity to replace an existing retailer with another, better funded, retailer or another business. Rather, retailers should use the retail meltdown as an opportunity to align landlord and retailer/tenant issues.

Embrace Technology

Modern technology can often help retailers give customers a unique shopping experience. Retail companies have employed, for example, 360-degree changing room mirrors with video-playback facilities and screens which track what people are trying and suggesting alternative outfits, 3D body scanning to help customer finds the right size/shape of clothing, and "magic mirrors” which allow customers to try on items virtually. These advancements in technology provide the brick-and-mortar retailer with a potential competitive advantage over their e-commerce rivals, and may actually be helpful in generating information that aids in inventory mix decisions down the road.

In conclusion, brick-and-mortar retailers can survive and indeed succeed in this otherwise difficult retail market. Price is not the only point of competition with Amazon and the other e-commerce giants. Rather, executing on the strategies outlined above amongst others can actually give a brick-and-mortar retailer a winning advantage over its online competition and generate profitability.

Jeffrey M. Pomerance, Esq. serves as senior counsel at SulmeyerKupetz, a premier financial restructuring, insolvency, business and litigation firm in California. He can be reached at jpomerance@sulmeyerlaw.com. 

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