One after the other, retailers are folding under the pressures of the pandemic—but in nearly all cases, those retailers had gone astray far before COVID-19 was part of the lexicon.
It’s a reckoning for fashion industry players, which Michael Appel, president of Appel Associates, blames on retailers being overstored, under-differentiated and, in many cases, over-leveraged.
“This is the inevitable rationalization of what would have happened maybe over the next five years, but it’s all being compressed now into the filings that you’re seeing because of Covid,” he told Sourcing Journal in its latest ‘On the Ground’ video. “Companies…really are either inadequately differentiated, they don’t have a sustainable business proposition, they’re not connecting with their customer and…they’re over leveraged because of all of the private-equity buyouts that have happened over the last couple of years.”
That, he said, may be the domino that set off what’s expected to be the continuous fall into bankruptcy.
“Over leveraged companies, they just don’t have the cash to continue operations,” Appel said.
While consumers face furloughs and demand falls in line with the shift to shopping for necessities above all, value players with diversified product ranges are pulling through, luxury brands are hoping for a rebound as stores start to reopen, and the middle is continuing its nosedive into irrelevance.
“The value players are winning, but they have been for a long, long time. And the middle is being further squeezed with a lack of differentiation or value, so you’re going to see a continuation of a trend that started a while ago, which is this bifurcation of performance between retailers,” Appel said.
In the five-prong strategy he uses to save troubled retailers from themselves, Appel—who was the former CEO of Rue21 brought in to turnaround the teen fashion purveyor—says understanding the customer is step No. 1, and one too many retailers still can’t say they’ve accomplished. But No. 5 on the list, which may really prove to be the first priority in post-coronavirus planning, is liquidity.
“You’ve got to operate the business to maximize liquidity,” he said. “In today’s situation, obviously, that becomes priority No. 1, 2, 3, 4 and 5…that’s what everyone is facing. And that’s what’s driving a lot of the filings.”
Historically, Appel says, a clean balance sheet means retailers can afford to invest in the business, invest in talent and invest in innovation, which “crushing debt” as he calls it, doesn’t allow for.
Looking at Neiman Marcus, which filed for bankruptcy on May 7, Appel said, “They have a loyal customer, tremendous brand equity, tremendous service, but they were so over leveraged that they couldn’t invest.”
Check out more in Sourcing Journal’s new ‘On the Ground’ video series, which brings new and needed voices in the supply chain to the fore.