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How Sears’ Supply Chain Will Fare in its Fall

For many—likely Sears Holdings included—the chain’s bankruptcy comes as little surprise.

The question now as Sears works its way through court proceedings is: What happens to its suppliers still caught in the fray?

If you ask former Sears Canada CEO Mark Cohen, the answer is twofold.

“The customer hasn’t disappeared, and in some manner of speaking the water level that gets lowered gets restored, but it could take a year or two for that to happen,” he said. “In the interval, which could take as much as two years, there’s an enormous amount of dislocation and disruption. First, there’s inventory trapped in the pipeline. Any vendor who has been putting themselves at risk with inventory in a pipeline at this late date should have had their head examined because this is the most predictable outcome you could imagine.”

As Jason Goldberg, senior vice president and division head of IDB Factors at IDB Bank added, Sears’ bankruptcy has been five years in the making.

“I think by nature of what’s transpired over the last five years, it’s mitigated any of the shock and awe of the traditional bankruptcy,” Goldberg said. “Those suppliers that at least have product in process, whether in production or in transit, I think in the short term it will play out fairly well for them…I believe [Sears will] have at least some credit to get some merchandise into stores for the holiday.”

For Cohen, the outlook may be less favorable for Sears’ suppliers.

“The folks who haven’t been paid will become unsecured creditors, and at some point downstream, are likely to get a few cents on the dollar or some form of accommodation, a form of new equity. In the end they’ll get very little,” Cohen said. “And if any didn’t have their eyes open in shipping Sears and weren’t getting paid in advance or on delivery, they are damn fools for exposing themselves. The real issue is they lose an outlet for their merchandise. And as incompetent as Sears and Kmart have been as operating entities, they still sold a lot of goods. So, these vendors are going to have to try to find another way to go to market.”

Given the diminished number of doors still open across the Sears and Kmart banners, the impact to suppliers will be less than it might have been under different circumstances.

Sears Holdings has been closing stores at a rapid clip in recent years, and with the bankruptcy filing came news that another 140 of its remaining 500 stores will close. And the chain’s considerably reduced footprint, yielded from chairman and former CEO Eddie Lampert’s consistent efforts to make Sears “asset light,” is part of what will curb the supply chain ramifications in light of the bankruptcy.

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“If we were having this conversation in 2010, when there were 3,600 stores, it would be a much different conversation than with 500 stores. I think the Sears pipeline was small,” said Brett Rose, founder and CEO of United National Consumer Suppliers, which sells to off-price retailers. Additionally, those that were still selling Sears were doing so with their eyes wide open. “People, us included, kept them on a tight leash,” he said.

There are still factories in other countries and domestic vendors supplying to Sears that still have product, but Rose expects that will be absorbed by other retailers.

“It won’t cause a major issue in the supply chain, especially since every retailer right now wants whatever they can get their hands on [given the tariffs],” Rose said. “So if there is stuff ready that was made for Sears, people are not going to say no. Every retailer we’ve been speaking to has been pushing orders up to get it in ahead of any potential tariffs. It’s an interesting opportunity but I don’t think you’ll see a surplus of merchandise all of a sudden flooding the market and driving the prices down.”

In light of the tariffs, particularly between the U.S. and China, which have sent apparel brands and retailers into a tizzy over trying to move product before a 25 percent tariff increase kicks in, or put plans in place to move out of Asia, Sears’ bankruptcy—albeit expected—is more disruptive than it otherwise might have been.

“With the tariffs hanging over a lot of suppliers’ heads with what’s going in on China, it becomes particularly the worst time ever to file for bankruptcy,” Goldberg said.

Can Sears bounce back?

To Goldberg, Sears as the world knows it, is over.

While it’s early yet to tell just how things will shake out in the bankruptcy case and how the market will react, it’s likely curtains down for the retail chain.

“My personal belief is that—albeit in a smaller footprint—is that it’s going to end up in liquidation…I think this has been the plan the entire time over the last five years,” Goldberg said. “I don’t think there’s really much there. The capital expenditure just to get those stores into shape, and by shape I mean competitive nature, is extraordinary.” And considering Sears has been losing money “every month, every quarter, every year” as Goldberg put it, while doing little in the way of trying to mitigate those losses, the likelihood of the retailer attempting a drastic revamp, is slim.

“I think there’s value to the Sears name, so I think there will be Sears stores at some point,” Goldberg said. “But I don’t think what we know as Sears, Kmart will exist in a year, year and a half.”