Innovation is Only Way Forward for Troubled Retailers
When you can’t win playing by the rules, it’s time to change the rules. In the case of debt ridden publicly held retailers, innovation is one of the most effective “rule changers” available.
American retail is either undergoing an extinction event or a Renaissance.
Pessimists see chain after chain crash to the ground in a maelstrom of digital competition, unpredictable consumers, and debt. Optimists watch new, technologically enabled retail companies emerge, attracting consumers with offerings that didn’t exist a dozen years ago.
Both visions are right, and wrong, depending on how much retailers are willing to invest in innovation. But, even the most optimistic must admit that the future looks bleak for many well-known chains.
Sears Holdings, battling off bankruptcy in the face of continued sales declines, refinanced $500 million in old debt with new debt, pushing out debt maturities and reducing its interest burden. Moody's determined this was a "distressed exchange" of debt, and therefore a default.
Ongoing anemic performance, a pre-Recession leveraged buyout and declining mall traffic forced Claire's Stores to default on $1.9 billion in debt and file for Chapter 11 bankruptcy in March.
Bon-Ton Stores filed for Chapter 11 bankruptcy in February after failing to convince creditors to restructure nearly $1 billion in debt and – absent a buyer – is now liquidating.
Charlotte Russe’s restructuring of nearly $230 million of debt was also a "distressed exchange,” according to Moody's.
Between now and the end of 2020, over $35 billion of retail debt is scheduled to come due. This may help explain why 34% of retail companies covered by Standard & Poor’s have negative outlooks and 75 retailers saw their credit ratings downgraded last year.
Companies with significant debt sometimes see innovation as unaffordable. Others understand that failing to innovate is foolhardy.
Consider three companies targeting the children’s market: Gymboree, Children’s Place and Toys “R” Us.
In 2015, Children’s Place faced an activist investor campaign that culminated in a disruptive proxy battle. In June 2017, Gymboree voluntarily entered into Chapter 11, hoping for $900 million in debt relief. And, this March, Toys “R” Us announced it would liquidate its entire U.S. operation, a move some trade observers considered inevitable in the wake of its 2005 $7.5 billion LBO.
Gymboree immediately closed 350 stores. Toys “R” Us also tried to cost cut its way to recovery, with predictably uninspiring results.
Children’s Place tried a different approach, strategically closing stores, but adding innovative digital tools allowing it to target shoppers in former Gymboree trading areas. By taking an innovative approach to product, investing in business technology, developing alternative channels and growing its international business, the company has become the poster child for retail recovery.
So, what could Toys “R” Us, for example, have done differently?
Imagine a chain called Toys “R” You, (TRY), with a ‘cradle-to-commencement’ strategy, starting when new parents receive gift boxes at the hospital containing baby care supplies, coupons, and educational material on the importance of learning toys on a child’s development. TRY operates a proprietary (and family-friendly) social network for young customers who receive birthday and holiday coupons for age-appropriate learning toys – digital and analog – and an invitation to celebrate with their friends at the store. By insightful investment in innovative systems and approaches to the customer, TRY could succeed in ways that Toys ‘R Us never dared.
Seem far-fetched? Innovative thinking often does, but it’s a better alternative to bankruptcy protection. Saddled with debt or debt free, successful retailers are all winning through business model and customer innovation.
Todd Hooper is a partner in the private equity and consumer and retail practices of A.T. Kearney, a global strategy and management consulting firm. He can be reached at [email protected].
American retail is either undergoing an extinction event or a Renaissance.
Pessimists see chain after chain crash to the ground in a maelstrom of digital competition, unpredictable consumers, and debt. Optimists watch new, technologically enabled retail companies emerge, attracting consumers with offerings that didn’t exist a dozen years ago.
Both visions are right, and wrong, depending on how much retailers are willing to invest in innovation. But, even the most optimistic must admit that the future looks bleak for many well-known chains.
Sears Holdings, battling off bankruptcy in the face of continued sales declines, refinanced $500 million in old debt with new debt, pushing out debt maturities and reducing its interest burden. Moody's determined this was a "distressed exchange" of debt, and therefore a default.
Ongoing anemic performance, a pre-Recession leveraged buyout and declining mall traffic forced Claire's Stores to default on $1.9 billion in debt and file for Chapter 11 bankruptcy in March.
Bon-Ton Stores filed for Chapter 11 bankruptcy in February after failing to convince creditors to restructure nearly $1 billion in debt and – absent a buyer – is now liquidating.
Charlotte Russe’s restructuring of nearly $230 million of debt was also a "distressed exchange,” according to Moody's.
Between now and the end of 2020, over $35 billion of retail debt is scheduled to come due. This may help explain why 34% of retail companies covered by Standard & Poor’s have negative outlooks and 75 retailers saw their credit ratings downgraded last year.
Companies with significant debt sometimes see innovation as unaffordable. Others understand that failing to innovate is foolhardy.
Consider three companies targeting the children’s market: Gymboree, Children’s Place and Toys “R” Us.
In 2015, Children’s Place faced an activist investor campaign that culminated in a disruptive proxy battle. In June 2017, Gymboree voluntarily entered into Chapter 11, hoping for $900 million in debt relief. And, this March, Toys “R” Us announced it would liquidate its entire U.S. operation, a move some trade observers considered inevitable in the wake of its 2005 $7.5 billion LBO.
Gymboree immediately closed 350 stores. Toys “R” Us also tried to cost cut its way to recovery, with predictably uninspiring results.
Children’s Place tried a different approach, strategically closing stores, but adding innovative digital tools allowing it to target shoppers in former Gymboree trading areas. By taking an innovative approach to product, investing in business technology, developing alternative channels and growing its international business, the company has become the poster child for retail recovery.
So, what could Toys “R” Us, for example, have done differently?
Imagine a chain called Toys “R” You, (TRY), with a ‘cradle-to-commencement’ strategy, starting when new parents receive gift boxes at the hospital containing baby care supplies, coupons, and educational material on the importance of learning toys on a child’s development. TRY operates a proprietary (and family-friendly) social network for young customers who receive birthday and holiday coupons for age-appropriate learning toys – digital and analog – and an invitation to celebrate with their friends at the store. By insightful investment in innovative systems and approaches to the customer, TRY could succeed in ways that Toys ‘R Us never dared.
Seem far-fetched? Innovative thinking often does, but it’s a better alternative to bankruptcy protection. Saddled with debt or debt free, successful retailers are all winning through business model and customer innovation.
Todd Hooper is a partner in the private equity and consumer and retail practices of A.T. Kearney, a global strategy and management consulting firm. He can be reached at [email protected].