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Expert: Heavy debt drives retail failures

Excessive debt continues to be an underappreciated factor in the demise of many retail chains.

That’s according to Bradley W. Snyder, executive managing director, Tiger Capital Group. Snyder, a corporate advisor on global business strategies, cited the current closing of Payless ShoeSource’s North American operations, the largest liquidation by store count in U.S. history, as the latest example of a debt-laden retail chain in bankruptcy.

Tiger, along with joint venture partner Great American Group, began liquidating $1 billion in inventory at 2,300 Payless stores this past February. The ongoing sale followed recent bankruptcies and store closures by Sears, Bon-Ton Stores, Nine West, Claire’s and Toys ‘R’ Us.

Within the fashion industry, explanations for such closures tend to hinge on the rise of e-commerce, stiff competition from off-price chains and the loss of brand-consciousness among younger shoppers, Snyder noted. But such assessments tell only one side of the story.

“The consensus in my part of the business world, which is peopled by the likes of financiers, appraisers, liquidators and bankruptcy professionals, is that most laypeople fail to grasp the degree to which financial factors—especially impatience triggered by a chain’s excessive debt—are driving retail failures,” Snyder said.

The latest data from McKinsey & Co.’s Private Markets Review illustrates the point. The Review sizes up the growth of private equity, which Snyder described as the sector most responsible for buying up retailers and saddling them with debt. According to the Review published this past February, global private equity net asset value grew by 18% last year; meanwhile, private-market fundraising reached about $778 billion during the same period. All told, overall private equity capitalization has grown more than sevenfold since 2002—twice as fast as the public markets.

“In layman’s terms that means that wealthy private investors continue to have more money to spend than they know what to do with,” Snyder stated.

He also cited research showing that two years in particular—2016 and 2017—appear to represent a kind of tipping point with respect to the ill effects of excessive retail debt. In 2017, for example, 21 major retailers filed for bankruptcy protection, he notes.

Why is debt such a problem for retail businesses?

“If the mortgage on your house were to quintuple overnight, paying your other bills would suddenly be a lot more stressful,” Snyder said. “Debt-saddled retailers found themselves in an analogous position: Precisely when they needed a lot of money to launch e-commerce operations, ramp up in-store experiences and overhaul their supply chains, they were faced with overwhelming debt service.”
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