Journal of Corporate Renewal

Nov/Dec 2015

continued from page 22

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unsuccessful, outdated, or too costly.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.