Shifting consumer shopping habits lead to surge in major retailer bankruptcy filings

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January 6, 2017 by Paul Dughi

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2016 saw a surge in retail bankruptcy filings, most of which were blamed upon shifts in consumer spending behavior. Some of those that filed for bankruptcy reorganization or liquidation were Aeropostale, Direct Buy, Sports Authority, Vestis Retail Group, Golfsmith, Movie Stop, Backwoods Retail, Nasty Gal, Pacific Sportswear,  Hancock Fabrics, and Total Hockey.

Additionally, just before Christmas, the Limited stores announced that it will be filing a bankruptcy proceeding shortly after the new year, and possibly close and liquidate all of its stores.

2016 also saw a surge in bankruptcy filings of significant franchisees of McDonald’s, Burger King and Long John Silver’s, as well as the parent entities of Sweet Tomatoes and Logan’s Roadhouse. These, too, were blamed on a change in consumer discretionary spending.

“Changing consumer habits have been a significant factor, but it is not only online shopping,” said Charles Tatelbaum, Director of Tripp Scott law firm and chair of the bankruptcy and creditors’ rights department. “Consumers want to be entertained during their shopping experience and not just stroll through a mall that has five of each type of offering the retailers. Also, many shopping centers that were built more than 10 years ago have had a changing demographic of the people in the area, and the retailing mix has not changed.”

Since most retailers and many casual dining establishments expect to “make their year” during the holiday season, failure to do so leaves them in a precarious financial position for the upcoming new year. This holiday season’s deep discounting that began shortly after Thanksgiving substantially eroded profit margins on sales This deep discounting that proliferated online, television and print advertising for both retailers and casual dining establishments, created a situation that even maintaining volume of sales may not have created the profits needed in order to extricate many retailers and restaurateurs from what has been the disastrous financial year.

Have retailers simply taught shoppers to shop only when there are huge discounts?  It’s even affected the world’s largest retailer.

“The traditional Walmart customer is shifting to dollar stores,” said Tatelbaum.  “Dollar stores are the fastest growing part of the retail environment. Customers are being more thrifty and looking only for bargains.”

With the recent report by Sears of a wider third-quarter loss than the prior year with sales declining 7.4% at established stores, Sears, (and perhaps its affiliated entity Kmart) had one last chance of survival during this holiday season, unless its principal owner chooses to invest even more money into this obviously sinking ship.

With business bankruptcy filings increasing at a rate not seen since the beginning of the 2008/2010 recession, the handwriting is on the wall that notwithstanding the euphoria that seems to pervade the equity markets, Main Street purveyors of goods and services are suffering greatly.

Factors, lenders, manufacturers and distributors have curtailed available credit for the purchase of goods for struggling retailers. With the uncertainty of the enforceability of consignment agreements brought on by the litigation in the Sports Authority bankruptcy case, the availability of inventory for financially struggling retailers has greatly diminished. Savvy consumers are only frequenting retailers with large inventories that are deeply discounted.

Even more troubling will be the loss of retail and food service jobs for those who are terminated as a result of store and restaurant closings, as these jobs cannot be replaced in the shrinking retail and food service sectors. These employees, who are usually at the bottom of the pay scale, are clearly the most vulnerable in today’s consumer economy. Furthermore, shopping mall owners, operators and other tenants will be substantially impacted by the closure of retail establishments as a result of bankruptcy liquidations. This situation creates a domino effect that will extend far beyond the entities that need bankruptcy protection.

Tatelbaumn’s advice for locations worried about bankruptcy?

“Work on a game plan as to how to restore to profitability,” he said.  “Chapter 11 reorganization will permit leases to be terminated and long-term contracts to be terminated, and if store locations or restaurant locations can be closed so as to consolidate business operations for profitable locations, then if there is a projection of profitability, reorganization under Chapter 11 is a real benefit.”

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