The opening session at the 2007 Main & Wall Conference established trends in the retail and finance industries and addressed key questions that are confronting growth-minded retailers.
By all accounts, momentum is running at unprecedented levels, money remains accessible for those who know where to look, and a variety of viable strategies are available to small and midsized retailers.
“Capital markets are absolutely dripping with liquidity,” reported David Deutsch, president of David N. Deutsch & Co., New York City. “Private equity funds are incredibly broad, diverse and well-funded. A record $215 billion in private-equity funding was raised in 2006, and this was in addition to the $152 billion of private-equity funding that was raised in 2005. More remarkably, approximately $300 billion in unspent privateequity funds remain available.”
Additionally, mergers and acquisitions (M&A) activity has continued at record levels across virtually every industry, but retail M&As are running at an even hotter pace. In each of the past three years, 2004 through 2006, retail M&A activity has exceeded the sum total of all retail M&As in the prior three-year period, 2000 through 2003.
Several drivers of retail M&A activity were cited:
Companies that cannot grow organically are satisfying their quest for growth through acquisitions;
There is continued consolidation in maturing markets, such as department stores or drug stores;
Companies are taking advantage of market valuation opportunities, often by going private; and
Liquidity throughout capital and debt markets has provided unprecedented availability of funds.
Panelists in the opening session of the Main & Wall Conference identified how retailers can convert challenging trends into strategic advantages:
The retail industry is drowning in a “sea of sameness.” Forget the idea that rivers should run deep and wide. Instead, merchandising rivers that flow fashion into stores should run shallow and wide.
Recognize Generation Gaps
Senior CEOs need to connect with the technology-driven lifestyles of their young consumers. Similarly, aging baby boomers are driving an increase in serviceoriented retailing. The do-it-yourself craze has evolved into a do-it-for-you model.
Evaluate Service Costs
Running a service business is very different than running a retail business. Service raises a number of questions: Do stores control service calls or are they centrally managed? How do you price service? Most importantly: Can you make a profit from service?
Embrace Merchandising Diversity
Understand that consumer demographics are even more diverse than ethnic differences imply. For instance, the booming Hispanic population is not a single consumer demographic. Shopping preferences among Hispanics vary depending upon their country of origin.
Multichannel retailing is the norm. Creating a consistent and integrated experience across all channels is imperative.
“Growth in the secondary secured debt market has exploded, growing from $140 million in 2000 to $28 billion in 2006,” stated Jeffrey Bloomberg, principal, managing director and office of the chairman at Gordon Bros. Group, Boston.
The consensus among Main & Wall panelists was that there was no reason to think the activity would slow in 2007. Cheryl Carner, managing director, retail finance, of CapitalSource Finance, Boston, acknowledged the record levels of M&A activity and the availability of capital to fund these projects are exciting, but added a note of caution, “We will continue to be challenged by competitive dynamics and the challenge for retailers is that, just because [opportunities for financial leverage] exist, it doesn’t mean retailers need to take advantage of all of them.”
When asked to comment on the state of the retail economy, Carner said: “The economy appears resilient and seems to have the dynamics of the Energizer bunny—it just keeps going. There was a slight downturn last summer when gas prices increased, which primarily impacted the casual-dining segment. Typically when there is a bump in the economy, middle-market retailers are the ones that get squeezed. Luxury-market retailers are not impacted and, although there are some challenges on the low end, these are often compensated by the tradedown impact.”
‘I applaud Main & Wall for putting together a conference focused on the mid-sized retailer–because this didn’t exist.’—Rodney Barstein, CEO
Simply Fashion Stores
Headquarters: Birmingham, Ala.No. of stores: 300 in 21 statesAnnual sales (2005)*: $115 million
*Source: Chain Store Guide
The “trade-down impact” refers to the fact that consumers who normally shop mid-market retailers move to lower-end and discount stores when the economy hiccups. From the perspective of lenders, such as CapitalSource Finance, a retailer’s ability to withstand economic fluctuations is a big consideration.
“We’re very concerned about cash flows and we think about how a retailer will respond to downturns,” explained Carner. “For instance, December was unseasonably warm and many of our clients did not hit their projections—maybe they had flat comps vs. a projected 4% increase. Fixed costs remain set so that [downturn] can really hit a retailer’s bottom line. As I said, just because retailers can leverage [debt] doesn’t mean it is always best.”
Banks that were hesitant to make loans even five years ago have actively embraced cash flow lending, and there is a proliferation of available hedge funds as well as opportunities through Business Development Corp. loans, Collateralized Debt Obligations and Collateralized Loan Obligations. However, every lender may not have the retailer’s best interests at heart.
“There are tremendous options in financing, but the caveat is that retailers have to understand what motivates the lender they are doing business with,” cautioned Carner. “Retailers should ask: ‘What will that lender do if things go sideways in my business?’ Some lenders make decisions based on the philosophy: ‘If things go south, I’m OK owning this business.’”
Similarly, retailers need to understand the operational strategy of the lender they are dealing with. Does the lender book and hold loans or book to sell? If it is the latter, then the retailer does not know who it will be doing business with in the future.
A sound piece of advice is to work with a lending partner that is dedicated to the retail industry. Companies that are focused on the retail vertical, or that have divisions dedicated to serving retailers, have a greater appreciation for and empathy with glitches in the retail economy.
Gordon Bros.’ Bloomberg added another realistic perspective about the wealth of liquidity in money markets.
“The pendulum swings equally hard in both directions,” he said. “There is more money available now, but when the liquidity starts to dry up, the pendulum will swing hard and far to the other side.”