Beyond Brick and Mortar—Retail at the Tipping Point


Date december 2015

Guest Editor Introduction for the Retail Issue of the Journal of Corporate Renewal

There is no question that we are living through the most dynamic U.S. retail environment since Wal-Mart rolled out nationwide in the 1990s. This time, it’s not a better operator dominating in head-to-head competition, but rather the tipping point of digital commerce and the advent of fast fashion that are changing the retail landscape.

While neither of these trends is new, their penetration into traditional retail leaves no room for underperforming retailers. Where once retailers chose between brick-and-mortar and omnichannel strategies, all are now somewhere along the omnichannel to optichannel spectrum. We believe that, ultimately, the omnichannel approach—all channels seamlessly accessible to all customers—will give way to optichannel strategies— optimized channels for segmented customers—as retailers are forced to review multichannel investments using conventional ROI metrics.

With consumers browsing their phones instead of aisles, it’s no surprise that mall traffic is down by half and big box has given way to virtual box. As retailers struggle to keep pace with these changes, those that adapt will flourish and those that don’t will fail.

Our issue begins with a look at e-commerce. Keith Vercauteren, Irene Marks, and Lauren Murphy of Wells Fargo Capital Finance argue that as e-commerce continues to eat away at traditional brick-and-mortar sales, lenders need to re-examine potential asset recoveries. Lenders and appraisers alike must adjust their methods to ensure that they keep pace with an increasingly innovative and changing retail environment. The authors provide a thoughtful assessment of past practices that are no longer sufficient as “e-tailers” gain market share.

James Hogarth and Holly Felder Etlin, CTP, of AlixPartners illustrate how store closures can be highly effective, yet complicated, decisions for struggling retailers. While closing stores is an important and often necessary first step toward a turnaround, it must be done with a sophisticated look at four-wall contribution, the interrelationship between an individual store and other channels, market conditions, operational improvements, liquidity considerations, and landlord reaction. Closing underperforming stores is seldom as simple as it looks but, if done correctly, can have an immediate and longstanding impact on profitability.

Two of my colleagues at Gordon Brothers, Rick Edwards and Bob Grosskopf, continue the discussion of store closings, but in the context of comparatively healthy operators. Rather than a sign of distress, pruning store portfolios has become the norm for proactive optichannel retailers. The stigma attached to the strategy of closing stores has faded as retailers begin to understand the profitability that can follow transitioning customers from overclustered stores or subpar regional markets to core stores or online. Retailers that prudently manage store footprints and embrace carefully implemented customer transference programs are more likely to maximize the efficiency of all channels and observe sustainable growth.

Thomas Scotti of Consensus explains why experienced investment bankers should be viewed as vital resources for struggling retailers. Often, retailers need an independent expert to help them grasp the scope of their underlying challenges. An investment banker can help to run a process for a sale, refinancing, or divestment that maximizes results. Bringing in outside help at the first sign of trouble is crucial to increasing the odds of a successful turnaround or sale.

Skadden’s Van C. Durrer examines the impact that the 2005 amendments to the U.S. Bankruptcy Code have had on retailers that file and what could change with proposed Chapter 11 reforms. The frequency with which Section 363 sales are used to liquidate retailers is one of the primary concerns put forth in the article. Fast liquidations with minimal recoveries for unsecured creditors could be partially curtailed if the proposed reforms are adopted, potentially increasing the likelihood of reorganizations. If the debtor/creditor balance shifts, the implications for retailers, landlords, secured lenders, and vendors will be significant.