Traditional Retail


Consumers Aren’t Buying It

Date December 2016

Retail is experiencing more disruption than any other sector, with perhaps the exception of energy. This time it’s more than a typical macro, sector, or geographic cycle. The catalysts for change—especially in the United States—are the strongest (and even perhaps more so) since Wal-Mart rolled across the country decades ago.

The combination of (1) digital commerce in all forms, (2) the global invasion of fast fashion, (3) shifts in spending toward experiences over merchandise, and (4) the permanent migration toward value since 2008 are hitting traditional store-based retail hard. Apparel overall is down 20 percent. Mall traffic is down 50 percent. Mass merchandisers, department stores, and big box and specialty retailers are all challenged. Even the recently high-flying factory outlet and urban center retail formats are facing challenges. On the other hand and to no one’s surprise, off-price and e-commerce are growing by double digits.

At first, traditional retailers pursued multichannel strategies to stay relevant in this new environment. Investments in e-commerce, mobile, and social were instituted initially and eventually connected using omnichannel strategies. My firm believes retailers now need to pursue a third phase—optichannel—where investments across all channels are reviewed using platform-wide, ROI-driven criteria. The articles that anchor this issue discuss recurring themes regarding how retailers, advisors, and lenders need to recognize and adjust to this new retail reality.

Stephen Coulombe, Bob Duffy, and Keith Jelinek of Berkeley Research Group discuss continuous renewal and point to five key drivers of change in retail: value shopping, channel shift, technology, delivery, and demographics. Millennials, who have taken over from baby boomers, have some distinct needs that will influence the future of retail. Retailers and their advisors need to stay nimble, shifting the deployment of assets and capital to stay relevant.

Next up are my partners Rick Edwards and Bob Grosskopf, who run the retail group at Gordon Brothers. Their article focuses on the need for a big data strategy in this optichannel third phase of modern retail. As Coulombe and Duffy pointed out, millennials are driving more purchase decisions, and this article explains how they are demanding tailored experiences across channels. Retailers need to work smarter and keep an eye on the broader ecosystem of retail, including social media and product and store reviews.

Chris Esposito and Anthony Masci of CIT focus on lessons learned from a failed grocery merger. With a view from the lender’s chair, the article steps through the challenges that had to be overcome, from funding into an overadvance to encountering higher expenses and lower inventory than expected. These challenges were then balanced against the enterprise value of the grocery boxes themselves.
Douglas Gooding, John Ventola, and Arian Galavis of Choate, Hall & Stewart provide a well-written legal review of the status of lender credit bidding today. Their article clearly juxtaposes the credit bidding restrictions from Fisker to the recent successful credit bidding in Aeropostale. As long as secured lenders are cooperative and have a clear lien on their collateral, the issue of “chilling” bids is mitigated and even potentially eliminated due to active bidding.
Michael Appel of Appel Associates discusses the global retail invasion trend. A review of key value-oriented international retailers who have invaded America feeds a list of common formulas these retailers have deployed to be successful in the United States.
Finally, Konstantin Danilov of the Analysis Group postulates that companies are more typically overvalued, not undervalued, in bankruptcy. In his article Danilov further delineates the difference between absolute and relative value to make his case.
On behalf of TMA and the JCR, I’d like to express my appreciation to the authors for their perspectives to the ongoing debate about the future of retail. As I gear up to guest edit a retail issue again next year, I’d like to hear from anyone who would like to contribute. I hope you enjoy this issue, and happy holidays.