Reshaping Retail: Strategies to counter bankruptcy risks

The retail industry witnessed a cascade of bankruptcy filings in 2024, with prominent names like Big Lots, Party City, The Container Store, and Vitamin Shoppe faltering under mounting economic pressure.

While online retail continues to siphon off market share, brick-and-mortar retailers face intensifying headwinds, and 2025 promises to bring further challenges. Amid these challenges, rethinking traditional operating models is not just a survival strategy — it’s a potential game-changer for retail resilience.

Despite the challenges this sector faces, strategies that optimize operating cash and minimize illiquid assets have proven to be a lifeline. The two largest items on a brick and mortar retailer’s balance sheet are generally real estate obligations and inventory.

Conversely, online giants like Amazon and Wayfair sidestep these constraints by leveraging flexible, cost-efficient business models. For many traditional retailers, these capital constraints erode their ability to invest in growth levers such as customer experience and operational efficiency and are often a source of their financial demise.

Retailers who deploy strategies that transform these illiquid assets into liquid assets can create an effective moat to protect against bankruptcy. Rethinking the traditional business model can significantly impact a brick and mortar’s balance sheet, freeing up capital to invest in growth and providing a cushion to protect against unforeseen downturns in consumer spending. 

Where real estate currently poses an operating challenge for retailers, this financial burden can be effectively transformed into a revenue stream. Retailers face a high onus for the cost of storefronts, which typically includes a lease payment and sometimes a proportion of sales. Leveraging this physical footprint with suppliers is a proven strategy for combatting the high costs of operating a store.

Brands such as Saks Fifth Avenue, for example, leverage their locations and allow individual brands to sell on consignment and operate micro-shops within the department store. This model generates cash flow for Saks, which receives a revenue share from the supplier, and offloads the burden of operating costs because inventory and sales remain under the domain of the supplier. 

Stores such as Saks have set a precedent, but this model is adaptable for other categories. Home improvement stores such as The Home Depot, for instance, could benefit from a similar subleasing strategy for niche brands. Retailers can adopt a landlord approach, turning their costly storefronts into revenue-generating hubs. By subleasing space to suppliers or partners, they not only offset operational expenses but also shift inventory and merchandising responsibilities back to suppliers, reducing risk. 

Product selection is ultimately more effective when the onus is shared with the supplier, who is very familiar with their customer and is incentivized to maintain products on the shelves to avoid out of stocks. Inventory mismanagement — whether from overstocking or stocking irrelevant products — often traps valuable cash in illiquid assets. This problem compounds financial strain, as surplus inventory necessitates steep discounts to clear, further eating into margins.

When this responsibility shifts from the retailer to the supplier, these challenges are minimized if not eliminated.  As retailers approach bankruptcy, strategic merchandising becomes critical. Traditional inventory purchasing models, where retailers are responsible for product purchasing, often worsen the situation.

As cash-strapped retailers struggle to pay suppliers, leaving suppliers in a precarious financial position, suppliers in turn are reluctant to provide products. This creates a downward spiral of death: struggling retailers need inventory more than ever to sustain operations, but are unable to obtain products from
suppliers. Product flow is critical to avoiding bankruptcy, and once in this situation, that lifeline is essentially severed. 

To mitigate this risk, strategies like scan-based trading (SBT) are gaining traction. This inventory model shifts inventory ownership to suppliers until the point of sale, reducing retailers' risk, improving cash flow, and enabling more accurate demand forecasting. It offers a rich supply of data, which helps suppliers better merchandise stores down to specific locations, ultimately increasing product movement and sales.

Retailers who use this model — such as Walmart, Target, Walgreens and Kroger — have effectively unlocked capital tied to inventory investments while simultaneously ensuring more efficient replenishment and stock management based on actual demand patterns. 

The retail sector is at a crossroads. Brick-and-mortar businesses can no longer rely on legacy models in a landscape increasingly dominated by agile, online-first competitors. By transforming liabilities such as real estate and inventory into strategic assets, retailers can unlock trapped capital and reposition themselves for sustainable growth.

While the road ahead remains challenging, those willing to adapt stand a stronger chance of weathering economic storms and thriving in a competitive marketplace.