Sears Holdings Corporation, Claire’s Stores, Inc. (which recently completed a debt exchange), True Religion Apparel, Inc., 99 Cents Only Stores LLC, Nebraska Book Company, Inc., Nine West Holdings, Inc. and Rue21, Inc. are seven retailers on the slippery slope to bankruptcy due to evolving consumer behaviors, according to a a report issued Wednesday by credit rating agency Fitch Ratings.
The Fitch report pinpoints several patterns regarding how consumer behavior often drags retailers to the brink of bankruptcy, including the rise of e-commerce and off-price retail, the decline of mall traffic and spending priorities that favor experiences over accumulation of things.
Fitch studied 30 recent retail bankruptcies that involved $10.5 billion of debt in the course of compiling the report. Half of them didn't survive the process, far more than the 17% across other industries that don't emerge, Fitch reported. (Grocery chains were an exception, with five of six emerging as operating businesses, with strong locations a key factor.)
The report is blunt: Retailers sliding toward bankruptcy with little chance of survival have “little reason to exist in the marketplace” and will therefore find it hard to attract investors to prevent or support it through the bankruptcy process.
“The lack of proprietary products in many categories leaves retailers vulnerable to permanent traffic decline resulting from the rise of competitors (for example, discounters and online-only players),” according to the report, which points out that mall-based apparel brands in particular can quickly become irrelevant as consumer sentiment changes. “The outcome in either case is that the bankrupt retailer has lost its place in the market and thus has limited value as a going concern,” according to the report.
The report is harsh, but there’s nothing in it that is very new. Fitch notes that the decline of shopping malls has challenged retailers by making it harder to maintain (much less boost) traffic. Additionally, when retailers’ assortments are essentially commodities that can be found almost anywhere, shoppers have little reason to frequent their stores and will opt instead for more convenient spots or, even more likely, buy online. And of course, that’s also a scenario that makes price the great differentiator.
There’s really no way out once price is the ultimate motivator, experts have told Retail Dive. “Nothing can kill a brand faster than ill-conceived discounting,” retail futurist Doug Stephens told Retail Dive in an email earlier this year. “It's problematic on a number of fronts. You either train your loyal customers to cherry-pick products on sale or, worse, lead them to believe that you’re not competitively priced day-to-day, leaving the door open to competitors.”
Indeed, that describes the retailers among those studied by Fitch that were least likely to make it out of the bankruptcy process as a going concern. “Most of the retailers at high risk of default are challenged by declining mall traffic, competition from online and other types of retailers, and/or a lack of a compelling product line,” according to the report. “Highly leveraged capital structures may become unsustainable in the face of these challenges.”
Steps that many retailers take to avoid bankruptcy can ultimately contribute to a downward spiral, the report notes. With declining sales, fixed costs loom larger, and many retailers respond by cutting back on store maintenance, labor and marketing. The report states: “These actions can exacerbate market share erosion through declines in the in-store experience. Severe or persistent market share contraction can lead to weak or negative FCF, which limits the ability to improve competitive position, creating a downward spiral of operations and results.”
Changes in the Chapter 11 code itself that have also stymied some retailers’ efforts to reorganize — in particular, changes from October 2005 that tightened deadlines for assuming or rejecting store leases and administrative claim treatment for goods received within 20 days of the bankruptcy filing date. That makes employment decisions more difficult and can interfere with a retailer’s ability to stay open during the all-important holiday season.