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Little margin for error


Unless you’ve just returned from spring break in Siberia, you know that retail analysts are abuzz with talk of bankruptcy. Having just weathered a merciless holiday (one of the worst in the last decade), with nary a private equity firm with the wherewithal or the credit line to step in as a safety net, troubled retailers are turning instead to bankruptcy court—some to reorganize, others to initiate liquidation.

Contrary to much of the sky-is-falling reaction that has surfaced from within the financial community in the last week, I think it pays to take a closer look at who, exactly, has gotten into trouble in the retail space and, more specifically, why they’re having to seek bankruptcy court protection in the first place.

Like the starting lineup of a minor league baseball team, the companies making bankruptcy news right now are mostly B players. You’ve got Bombay, Levitz, Sharper Image, Wickes, Fortunoff and Harvey Electronics, among others. That’s not to say they aren’t—or weren’t at one time—A-league merchants. Some were and still are, including Fortunoff, which was recently purchased by the same parent as Lord & Taylor.

However, once upon a not-too-distant time, the economics of the retail industry were very different. Individual categories went deep in the number of vertical chains serving their sectors. In electronics alone, names like The Good Guys, The Wiz, Ultimate Electronics and Rex Stores all seemed to coexist, somewhat copacetically, with their national competitors. Now, the CE sector as a whole is facing the dying-off of smaller chains as well as the very real prospect that there may be only one national CE big-box chain by the time 2009 rolls around.

To interpret any of this as a condemnation of retailing in general is not the point. Rather, when you stop to analyze what else these bankrupt (or nearly bankrupt) companies have in common, the story circles back to one central issue: margins.

In an age where consumers shop for groceries at warehouse clubs, and $29 DVD players are now commodity items, the retail industry is being forced to ask itself some very tough questions. Among them is nothing less than the ultimate question of whether certain retail models have fallen out of sync with the behaviors and expectations of today’s consumer.

Second- and third-tier chains whose business models are predicated on disproportionately high margins and high prices are now being forced to re-examine their role and place in the retail economy. Whether they choose to accept it or not, these traditionally minded companies need to acknowledge, at the very least, that value-based retailing is not just an alternative to mainstream commerce. Rather, value-based retailing is the new main stream.

Today’s consumer has come to expect a strong value proposition whenever he or she breaks out the credit card. Nowhere is that demonstrated better than in the e-commerce sector, where free shipping has evolved into the new value-added standard. And similar expectations exist in stores, too.

For the sake of companies backed into the bankruptcy corner, I hope this fact does not get lost—especially as they go through the arduous process of rethinking both their finances as well as their place in the retail market.

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