‘This is an apocalypse’: The coronavirus crisis is exposing mid-tier retailers’ weaknesses
The coronavirus pandemic is exposing huge weaknesses for some mid-tier retailers and could hasten their demises.
The growing crisis will impact businesses of all sizes, but older retailers — especially those saddled with mounting debt loads — will likely be the earliest retail casualties of this pandemic. In-store foot traffic is plummeting and brands are being forced to figure out a way forward. Many retailers are in the midst of some sort of digital transformation, and have posted mixed results.
Put together: stores in the middle may very likely see a shakeout by the end of the year.
Brands like JC Penney, J.Crew and Nordstrom present helpful examples. At its most recent earnings report, JC Penney reported same-store sales had gone down 7% in the fourth quarter, and forecast those to decline 4.5% in fiscal year 2020. Meanwhile, the 117-year-old retail chain faces a $3.5 billion debt load. J.Crew also reported sales decreasing by 2% in the last quarter; it too has a $1.7 billion long-term debt. While Nordstrom has made some big strides on the digital front, its latest earnings report missed analyst estimates.
While many retailers have debt in certain forms, these players present an especially difficult challenge given the global landscape. They’ve seen decreasing sales before the coronavirus hit; both JCP and J.Crew are in the midst of an attempt at transformation and they haven’t figured out how to use digital to grow sales, plus have debts.
According to Neil Saunders, managing director of GlobalData Retail, they’re part of a group of mid-tier retailers that haven’t updated their product lines to fit with current trends, nor have they built out robust digital programs to stay competitive with online players. “Most importantly, they don’t have great balance sheets either,” he said. “They enter this crisis in a very weakened state and very likely are going to succumb to failure.”
There have been economic downturns before, but this seems like an especially perfect storm. Three things specifically make the business life during the coronavirus outbreak especially hard for retail businesses. For one, the need to socially distance will almost certainly hurt foot traffic. Second, world markets have unsurprisingly responded negatively, which likely means consumer confidence will decrease thus leading to waning demand for non-essential products. Lastly, the virus’s spread has significantly hurt supply chains overseas. “We’re in such uncharted waters, we have no idea what is going to happen,” said Saunders.
Some retailers, especially those with less debt than competitors may be able to weather this storm. “A retailer like Macy’s has a lot more firepower,” said Saunders, “Nordstrom is probably in a relatively good position.” Others, like Neiman Marcus, which have had rumors about bankruptcy being on the horizon, are in a bad spot.
Forrester principal analyst Sucharita Kodali sees the writing on the wall. “This is essentially a recession and that is the worst thing that could happen for these vulnerable brands,” she wrote in an email to Modern Retail. But, she added that mid-tier retailers certainly aren’t unique; “Yes, I do expect many more bankruptcies this year but that will be true across the entire business world,” she wrote.
Still, this is an especially dire situation for companies that have spent years struggling to rejuvenate beleaguered businesses. “I’m pretty pessimistic about the turnaround efforts,” said retail consultant Steve Dennis, “but this really couldn’t have come at a worse time.” Businesses that have weak balance sheets due to mounting debt likely only have a little runway to survive before throwing in the towel. “Already if you’re short on time and short on cash,” Dennis went on.
There’s a bitter irony to all this, noted Saunders; “We’ve always resisted using the word ‘retail apocalypse,’ but this is an apocalypse,” he said. “This will be catastrophic for some,” he predicted. “We’ll see by the end of the year a remarkably different retail landscape.”