By Dave Spargo, firstname.lastname@example.org
While many people believe the worst of the recession is already behind us, some may be surprised to learn that there will likely be an increase in the number of chain stores filing for bankruptcy this year. Although the economy has been slowly recovering, the chain retail and restaurant industries still have a long road ahead before they are on a course of long-term profitability. While filing for bankruptcy may typically not be viewed as a positive occurrence, it may be the best solution for retail businesses to right-size obligations and remain competitive.
A major factor that has led to the growth in and continued trend toward bankruptcy filings is the increase in the cost structure underlying chain store businesses. The cost of goods has continued to increase due to rising commodity and production costs. Other expenses that continue to increase include utilities, which have grown steadily due to the rise in fuel prices, as well as the annual costs associated with maintaining brick-and-mortar stores.
Unfortunately, one result is that top-line sales have not kept pace with expense increases. In the last few years, sales for most retail and restaurant companies have stabilized and are beginning to trend up. However, any apparent new growth may be artificial since sales are typically measured from a basis of lower receipts overall due to the declines experienced during the height of the recession.
A growing factor that has hurt retailers is the recent phenomenon of “showrooming” spawned by online merchandisers. “Showrooming” occurs when consumers visit a brick-and-mortar store to examine a product in person but then return home to buy it from an online retailer, often at a cheaper price. While stores have been attempting to figure out strategies to thwart this phenomenon, such as by offering products sold exclusively through certain retail outlets; it continues to present a challenge.
With the increase in pressure from online rivals and shrinking profit margins, retailers’ ability to service debt and maintain their obligations has been drastically impaired and many are feeling “the squeeze.” During the recessionary years, lenders were frequently willing to extend the terms of loan obligations to assist businesses which were struggling; thus buying the lender and retailer time for the economy to improve. In today’s market however, as a result of the availability of other options and pressures, lenders can be resistant to granting extensions.
Many banks are under pressure to clear their books of certain underperforming or non-core loans and may be willing to force a bankruptcy to enable them to be paid off (even at a discount) through exit financing options or liquidation in Chapter 7 bankruptcy.
As more and more chain stores have had to turn to bankruptcy to restructure their obligations and strengthen their balance sheets, many have become more competitive in the marketplace. Those chain stores that have not restructured may be attempting to compete in a new market in which they are unable to offer as favorable terms to their customers.
Many chain stores negotiated their debt and original lease obligations during the height of the market and made commitments that are no longer feasible. Rather than face dissolution of their organization and liquidation of all business assets, retailers should consider proactively pursuing bankruptcy and restructuring their obligation. Frequently, businesses wait too long and enter bankruptcy with a tarnished brand as a result of a prolonged lack of marketing, as well as a l