Recipe for Successful Retailer Transformation

The retail sector continues to experience turmoil with numerous retailers filing for Chapter 11, liquidating or restructuring out of court. But there is a silver lining for the winners, with significant and profitable opportunities for retailers that successfully re-tool their operating models and customer experience.

In 2020, with the onset of the pandemic, the pace of the retail sector disruption has accelerated and the sheer number of Chapter 11 creditor protection and out-of-court restructuring announcements have grown exponentially, including such well-known names as Tailored Brands, Pier 1, New York & Company, Ascena Retail Group, Forever 21, Century 21, Stein Mart, Sur La Table, Stage Stores, Modell’s, Tuesday Morning, J.C. Penney and Neiman Marcus

The pandemic is not the underlying cause for most retailer restructurings. Instead, it has been the accelerator. The debt previously added to retailers’ balance sheets from leveraged buy-out debt and earlier failed transformations has prevented those retailers from making the necessary investments to their business models to re-tool their store fleets, operational capabilities, technology and processes to more effectively and profitably compete in the digital environment.

Primarily due to the debt service commitments, many retailers didn’t have access to the liquidity to fund the new business models and operational capabilities that were necessary to meet the expanding and changing customer demands and expectations. These include the operational capabilities for frictionless omnichannel capabilities.

Since 2010, the retail market has grown at 2% or less most years, which has resulted in numerous retailers’ market capitalization declining meaningfully. And this has occurred at a time when Amazon’s market capitalization increased 28-fold due to the company’s rapid growth rates and steady increase in market share.

Billions of Dollars of Market Value Available From Downsized, Bankrupt Retailers

Massive amounts of market share — or billions of dollars of market value — is available from retailers that have gone out of business or have closed stores. While much of this market share has been won by Amazon, Wayfair, Walmart, Target and other discounters and the home improvement chains, we believe there is plenty available for other retailers that transform their operating model with a customer focus.

While people are still shopping, spending behaviour has changed. Enclosed mall traffic is considerably down and continuing its multi-year decline. But stores whose entrances are open to the outside are holding their own and online traffic is growing.

In addition, retailers have received a windfall amounting to as much as tens of billions of additional market share in 2020 and hopefully into 2021 due to typical household spending being curtailed as a result of restrictions imposed by the pandemic.