Journal of
Corporate
Renewal
Nov/Dec
2015
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the storm while they win back their
customers or find new ones. However,
sometimes outside help is needed
in the form of additional capital,
expertise, or both. This is where
an investment banker experienced
in the retail sector can help.
The Diligence Process
When presented with a troubled
retailer, an investment banker must
assess, fully understand, and be
able to articulate the strengths and
weaknesses—the assets and liabilities—
of the company. Often, an investment
banker works hand in hand in a
collaborative manner with the chief
restructuring officer, if there is one, in
making these assessments. Through
this diligence process, an investment
banker must develop the best strategy
to attract the most value-added
investors that the situation will allow.
Questions that must be answered
include: How much investment is
needed to effectuate a turnaround
plan, and what is the likelihood of
success? Can the company effect the
changes itself, or does it need others
to help execute them? Are the legacy
problems of such magnitude that
the only way for some or all of the
company to be salvaged is to put it
into a formal bankruptcy proceeding?
These and other questions must be
answered quickly so that a marketing
process can be designed and initiated.
There are many external and internal
reasons why a retailer underperforms
its operating plan or finds itself in
decline. With regard to internal factors,
in the tight-fisted world of retail, the
difference between success and failure
may be only a few percentage points.
Merchandise, personnel, and/or real
estate costs may be too high for a
retailer’s sales volume, and the retailer’s
methods of acquiring new customers
or retaining old customers may be
unsuccessful, outdated, or too costly.
In addition, the supply chain may be
long, often six months or more, leaving
little ability to change the product
assortment in time to react to changing
tastes or demands of customers.
Seamless execution in having the right
goods at the right price at the right time
is critical, and when the retailer fails to
do so, there is sometimes very little it
can then do to attract outside investors
to provide the necessary funding,
expertise, or both to fix these problems.
There are also significant macro
issues facing traditional retailers
today that make it difficult for them
to attract the investment community.
Mall traffic is declining as consumers
increasingly embrace online and
mobile channels. Multiunit retail is
also suspect to many investors due to
the high cost to build out and fixture
each unit (which are sometimes
partially financed by landlords over
the term of a lease in exchange for
higher rent). This investment and the
cost of initial inventory impact an
investor’s return on investment and
increase its risk, devaluing the sector
when compared to other investment
alternatives that are asset-light.
For e-commerce retailers, the
cost of customer acquisition can
be both high and unpredictable,
impacting the company’s ability to
achieve necessary scale. Eyeballs are
expensive, as Google, Amazon, and
others dominate online traffic and
charge accordingly to direct traffic
to retailers. While many previously
believed that everyone would be an
e-commerce shopper at least some of
the time, the prevailing thinking today
is that there are a finite number of true
Web shoppers (though this number
is surely growing). The competition
for these core Web shoppers is
increasingly intense, and the costs
of reaching them can hamper an
online retailer’s ability to grow
beyond the handful of enthusiasts
who represent its core customers.
Finding Options
Today, unless a retailer, whether
brick-and-mortar, e-commerce, or
omnichannel, has something unique
about its product or service—either a
valuable brand or difficult to replicate
selling channel, for example—it will
be difficult to attract going concern
investors. For many investors, retail
is simply a method of distribution,
and Amazon, eBay, and select others
do it better and more cheaply. Retail
companies that do not attract going
concern investors are left to repurpose
their assets. Their inventory may
be sold to inventory liquidators,
their brand name to intellectual
property holding companies, and
their leases to other retailers or
to the landlords themselves.
However, there are still scenarios
in which retailers can attract going
concern investors, recover from
distress, and thrive. Depending on
how severe the problems are and the
quality of the underlying business
model, this can even occur outside
of a bankruptcy proceeding.
Today, unless a retailer, whether brick-and-mortar, e-commerce,
or omnichannel, has something unique about its product or service—
either a valuable brand or difficult to replicate selling channel, for
example—it will be difficult to attract going concern investors.
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