Industries to Watch: Problems in Retail Not Just Hype

Sears, JCPenney, Kmart, Radio Shack, Best Buy and countless smaller retailers have had all manners of difficulties in recent times. Their respective financial problems are not just a case of hype once the battles retail businesses have to fight on multiple fronts is considered. It’s why the industry in general has earned a dubious place among NACM’s “Industries to Watch.”

“There are so many factors to deal with in retail,” said Bruce Nathan, Esq., partner with Lowenstein Sandler LLP. “If credit people are being kept up a night, retail may be their biggest industry of concern. The bottom line is you are going to see a shakeout in the retail area in the next few years.”

The list of reasons cited by Nathan, among others who put retail of at the top of the list of industries creditors should be watching, includes a high number of financially overleveraged retailers, those where the size or number of stores is unsustainable, an inadequate response to e-commerce and, often, notoriously poor management decisions. While not all retail businesses are contenting with these problems, multiple issues are often in play for those that are struggling. It creates a potentially toxic mix that creditors should be monitoring closely.

“People are watching JCPenney, and should be,” Nathan said. “People are concerned about Sears, Radio Shack. Best Buy seemed to stabilize for now, but there was a lot of concern about them for a long time.” Nathan stressed that these are mostly bigger retailers, and that segment of the industry likely faces the most significant challenges. However, he noted smaller businesses also are quite challenged, especially by e-commerce competition.

Faulting businesses of all sizes was their inability to react quickly or seriously enough to institute change when online retail first started eating up market share. That resulted in something akin to the sports adage of “playing from behind.” The infamous Borders implosion was one example of a failure many blamed on the rise of e-commerce.

The problem should a retailer of any size head toward insolvency or a Chapter 11 is the potential for a domino effect, the result of which would likely include retailer consolidation. With fewer players in the market, that will only lead to higher accounts receivables concentration for suppliers, something creditors typically shy away from, or want to, as much as possible. A limiting of choices may leave some suppliers with little choice though.

- Brian Shappell, CBA, CICP, NACM staff writer

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