Retail Bankruptcies
We’re certainly going to see a lot fewer stores in the future, but I don’t think Steve Benen’s quite right to say “Think about your local mall, and then think about a quarter of the stores disappearing, as compared to a year prior.” The motive for his post was a Wall Street Journal report that “Analysts estimate that from about 10% to 26% of all retailers are in financial distress and in danger of filing for Chapter 11.”
But even if a quarter of all retail firms go bankrupt, that doesn’t mean we’ll see a 25 percent decrease in the number of retail outlets. For one thing, a firm going bankrupt isn’t the same as the firm becoming non-existent. The point of Chapter 11 is to give firms a chance to reorganize and return to viability and certainly some Chapter 11 firms will do that. And even if a firm does wind up being liquidated under Chapter 7 that doesn’t mean all of their outlets will vanish. One thing that can happen during a liquidation process is that competing firms will take over some of the choicer locations currently occupied by the liquidated firm. And last, some non-bankrupt firms may expand — a downturn is good for a minority of firms.
Then on the flipside, many of the 75-90 percent of retailers that don’t go bankrupt will be closing locations nonetheless. When consumer demand goes down, the first response is to discount the merchandise to make sure you can move it. But the second response is to start stocking less inventory and operating fewer stores. And that’ll be the case for many firms whose underlying finances may be sound. Long story short, we can’t straightforwardly project the volume of retail closures from the volume of retailer bankruptcies.
42 Responses to “Retail Bankruptcies”
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December 29th, 2008 at 1:04 pm
And last, some non-bankrupt firms may expand — a downturn is good for a minority of firms.
Right. Nothing like a sharp downturn to reinvigorate shopping areas with more creative, innovative retailers who deserve a crack at the prime spaces occupied by tired, flagging firms with stale concepts.
December 29th, 2008 at 1:10 pm
This seems to be the point that’s missing in so much media coverage of bankruptcy. If GM or Chrysler files for bankruptcy, it doesn’t mean they disappear off the face of the planet.
December 29th, 2008 at 1:12 pm
the most important thing to understand about the economic crisis is that the scale of consumer spending is going to drop for years to come: that’s the whole point of deleveraging, that there will be less credit in society as a whole. people will not be able to simply pile up credit-card debt, they won’t be using their houses as ATMs, and the liquidity preference (and a likely cultural aversion to debt more comparable to life in these united states 50 years ago) will remain for a while.
retailers will feel all of that.
as for chapter 11, i’m no expert, but from what i read, very few retailers in recent years have returned from chapter 11.
supply and demand are out of balance in retail, and as they return to balance, it will be supply more than demand that leads the way….
December 29th, 2008 at 1:22 pm
At the King of Prussia Mall here in Pennsylvania, the saleswoman in the Hermes store wanted $1500 for a leather covered memo book.
So fuck her.
December 29th, 2008 at 1:23 pm
PS Fuck Hermes too.
December 29th, 2008 at 1:27 pm
There’s also the variable of rent. Mall owners really don’t want lots of vacant space in their malls (or other retail real estate locations). As stores close and leases come up for renegotiation we can expect to see the cost of retail space fall substantially. This will help some retailers keep more spaces open and other retailers will take advantage of lower rents to open stores that otherwise would not have been viable.
December 29th, 2008 at 1:33 pm
Another thing about malls is that their management tends to be rather strongly biased towards chain stores that have a presence in numerous malls across the country. If vacancies rise and malls are forced to lower rents, their managers may look more kindly towards local stores moving into their malls.
December 29th, 2008 at 1:34 pm
This seems to be the point that’s missing in so much media coverage of bankruptcy. If GM or Chrysler files for bankruptcy, it doesn’t mean they disappear off the face of the planet.
No, but bankruptcy affects different industries differently. If a car is generally understood by most people to be a ten-year investment, the fact that an automaker has just filed for bankruptcy is a serious disincentive to spending your money there. It’s likely that filing for bankruptcy would impact GM’s sales numbers far more dramatically than it would (say) Wal-Mart’s.
December 29th, 2008 at 1:41 pm
Malls were in trouble before this whole thing happened.
So Benen is more right than you think…yet your nuanced analysis is generally right.
December 29th, 2008 at 1:42 pm
@Don Williams: The day after Christmas, I hit a few high-end retailers looking for bargains, and had much the same experience as you. Not surprisingly, I saw a lot more browsers than buyers.
What hasn’t sunk in on retailers yet is that 60 percent off a preposterous price just gets you down to an excessive price, and consumers aren’t buying that in this environment.
I wound up buying most of what I needed at the same discount outlets I would go to ordinarily. It will be interesting to see what their inventories look like in, say, March or April.
December 29th, 2008 at 1:45 pm
The residential real estate boom was accompanied by a retail expansion– so, one would expect that strip malls in areas with lots of foreclosures will shut down. In addition, big three auto dealers are in very deep doo doo.
But I’d expect that established, stable neighborhood retail will pull through– though with some bruising…
December 29th, 2008 at 1:46 pm
I had a similar experience to Don Williams and allbetsareoff. The high end chains just don’t seem to have grasped that a 15-20% discount isn’t going to move merchandise in this environment. Old Navy, on the other hand, maybe for the first time in a decade, has gotten something right marketing-wise, and has slashed the hell out of pretty much everything in the store. And I’ve bought six items there in the last week and a half, whereas I normally would be unlikely to shop there at all.
December 29th, 2008 at 2:08 pm
What hasn’t sunk in on retailers yet is that 60 percent off a preposterous price just gets you down to an excessive price
Well, if the retail outlet bought the item wholesale for the excessive price, they have to charge the preposterous price to make any money.
I leafed through the color ads in the paper looking to see if there was anything in there I just had to have and came up empty. (We already have 5 TV’s, and I can get DVD’s to watch from my local library for free.) I do get a belly laugh from the idea of anybody paying close to $100 for an HDMI cable.
December 29th, 2008 at 2:09 pm
I don’t know that I’m as sanguine as you or as nervous as Benen. I am very nervous. You have a point that there isn’t a strict relationship between Chapter 11s and retail location closures, but bankruptcy is in many ways just the bleeding edge. Even if you look at national brands, many locations are franchisees, meaning they are bankrolled by a smaller entity that may be more prone to run into trouble when cash flow tightens. Retail leases often have minimum income requirements. Malls may actually force out under-performing stores (though renegotiating may be more common, or perhaps relocating to a less desirable mall storefront, given the reality of no prospective tenants). Mall-located stores may choose themselves to relocate to less-expensive digs in a strip mall or standalone. Meanwhile, all locations, even surviving ones, will be cutting back on staff.
It won’t be a mallcopalypse, at least not in a George Romero sense, but it’s going to be a very grim year for a lot of retailers and the landlords who depend on them.
December 29th, 2008 at 2:18 pm
lakefxdan says: Malls may actually force out under-performing stores.
I don’t think malls will be forcing out stores anytime soon. In this environment, they’ll be fighting to keep the ones they’ve got.
December 29th, 2008 at 2:25 pm
Took a while to get to the point of who bears the pain of 25% of all retailers going through bankruptcy. No matter what kind of cushion the owners/stockholders get, the staff gets laid off, loses medical coverage, takes cuts to already sparse wages, and generally gets to live with dread and humiliation for a few months or years. There are going to be a hundred of those folks for every stockholder taking a hit in his portfolio.
December 29th, 2008 at 2:27 pm
Which means that rather than a lot of bankrupt retailers, we’ll instead have a lot of bankrupt mall owners.
They need money too.
December 29th, 2008 at 2:53 pm
One of the odd parts of bankruptcy is that many furniture stores will probably go bankrupt. furniture is generally a low margin business, depends a lot on credit, has to pay for real world facilities, and is very elastic in the short term. However, it does not compete with the internet.
My guess furniture stores will be the first sign of severe problems. Also, the speciality electronic stores that depend upon credit (think the Big Screen store) will also suffer.
My guess is that many of the building trades such as granite counter tops. flooring, remodeling will also suffer.
December 29th, 2008 at 3:12 pm
Furniture is unusually decentralized, in the sense that there aren’t many nationwide chains other than Ikea. Most furniture retailers are regional or local. To the extent that the downturn hits some parts of the country worse than others, the effects on furniture retailers will vary considerably by location.
December 29th, 2008 at 4:37 pm
What everyone is missing here:
– Aside from government, the retail/restaurant sector was the highest employment growth in this country. Think unemployment is bad now? Wait until even 15% of all retail locations go out of business.
December 29th, 2008 at 4:55 pm
The furniture slump is here, at least anecdotally. Last week I sat on a plane next to a guy who had a small business as a middle man in between Philippine manufacturers and companies in North Carolina (who knew??). His business is heading south along with the housing slump. And if someone sneezes in NC then someone in Manila gets sick.
December 29th, 2008 at 6:20 pm
Don Williams,
Louis Vuitton has profit margins of about 9%. So, a $2000 handbag costs them about $1820 to make when you include materials, labor, advertising, employee benifits etc. One of the big reasons their products are expensive is they are made in France by people who make $30 an hour, work a 35 hour week, get 6-8 weeks paid vacation and are represented by powerful unions.
My boyfriend worked in college as a salesman at LV and the health insurance was so good my doctor had to call and confirm because he didn’t belive any insurance was that generous.
I just find it funny when people are so pro union but so against buying products that are expensive becasue they are made in progressive first world countries rather than third world hell holes.
Why is a LV zip hoddie $600 and a walmart zip hoodie $20 – a lot has to do with who made it and how they were treated.
December 29th, 2008 at 8:10 pm
Mr. Yglesias and many of the commentors here are a bit behind the news. The first wave of retailer Chapter 11s has already passed. The majority of those that received some form of DIP financing or white knight have already failed a second time and are finishing up liquidation. It is very unlikely that the next wave of retailers to go bankrupt will get any sort of restructuring financing, and that they will go straight to Chapter 7.
Also, the malls are already hurting, and low- and mid-market malls are already filing for bankruptcy or just shuttering.
Cranky
December 29th, 2008 at 11:21 pm
jmo:
It does not cost anywhere near $600 to make a zip hoodie in the United States with union labor. I found this site selling them for about $20 wholesale. Clearly this is not LV quality, but even if we assuming a 20x increase in materials and labor, you’d still have a solid $200 profit margin.
To give you a counterexample, my wife used to work in the corporate office of a well-known American handbag manufacturer (which is slightly less pricey than LV, but still very expensive) and her compensation and benefits were nothing special. And the product manufacturing cost was a fraction of the purchase price.
You can obviously raise your operating costs to anything you like, especially if you include super-lavish executive compensation, ridiculous office space, corporate jets, etc. The fact that your typical LV employee is well-compensated is nice, but I can’t imagine it costs them more than $2k extra per salesperson per year on the outside (multiplied by a hundred salespeople that’s still pocket change by the standards of corporate compensation.)
December 30th, 2008 at 12:02 am
The CAP,
Of course it doesn’t cost $600 but a not inconsiderable part of that $600 goes towards treating everyone at every level of the company very well. For example – as LV never has a sale employees are able to buy products at the end of the season at upwards of 85% off.
I’m just always surprised that the most pro-union people would balk at paying the kinds of prices it would take to treat everyone at every step of the manufacture, transport, and sale of a product in an acceptable manner.
I mean, I’ve been to the BMW factory in Munich with the beer vending machines on the factory floor for the convience of the lavishly paid and lovingly treated, IG Metall represented, German factory workers.
BMW has a profit margin of 5.3% so a $50k BMW cost them $47,500 to make – due in no small part to the lavish compensation of BMW union respresented blue and white collar employees.
December 30th, 2008 at 12:38 am
The CAP,
And by “ridiculous office space” did you mean downtown, centrally located, easily accessible by numerous forms of public transport, “green”, ergonomically designed vs. some nondescript exurban office park?
I’m just saying, if you sold a product that was “progressive/yglesian” at every level, the extra cost would be more than significant.
December 30th, 2008 at 1:24 am
I imagine a major part of the reason Louis Vuitton products are so pricey is because they are made in small quantities. Their business model is to sell a relatively tiny number of units at a high price point, which works for high-end status items but doesn’t have much relevance to the average consumer.
Personally I’d love to see the reemergence of a middle-of-the-road business strategy selling well-made items to a mass market, which would cost more than the Wal-Mart cheapies but have enough economies of scale to put it within reach of regular folks. These days you often have the choice of ultra-cheap crap that breaks right away or high-end stuff that only a CEO could afford.
OTOH if you have kids it rarely makes sense to spend a lot to get longevity, particularly if it’s clothes or shoes. In six months they’ve outgrown the shoes, and the next kid in line has different shaped feet.
December 30th, 2008 at 6:01 am
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December 30th, 2008 at 6:03 am
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December 30th, 2008 at 10:15 am
How about American Apparel? They’re really not my style and have never bought anything at their stores, and Dov Charney is a creep extraordinaire, but they do produce clothing locally for a price that’s more expensive than what you’d pay at Target but is definitely within a reasonable price range.
If someone who wasn’t a sexually-harassing pervert used a similar business model to make clothes that I wanted to wear, I’d buy their clothes.
December 30th, 2008 at 4:40 pm
It’s worth noting that the amount of square feet of retail space per capita in the US is gross compared to the rest of the world. We simply don’t need the amount of retail space that’s been built up over the last decade or so, and it shouldn’t be surprising that so many strip malls and retail centers are now suffering.
It’s a recession, yes, but this is also a long overdue market correction. And I for one say good riddance; fewer malls and big box stores blighting the landscape is a good thing, and I don’t think I’m in any danger of running out of places to shop.
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