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Turnaround Specialist Michael Appel on the Three Cs: Capital, Culture and a Consumer Focus

Disruption has led to tremors throughout the retail ecosystem—from vendors to bankers to factors to store developers. More than 300 retailers had filed for bankruptcy in the first five months of 2017, up 31 percent versus the same year-ago period. Announced store closings are up as well.

Retail turnaround specialist Michael Appel, founder of Appel Associates, sits in the middle of the maelstrom, as he helps companies like Baccarat, Wilkes Bashford, Laura Ashley attempt to right their ships before its too late. His expertise spans softgoods categories across department, specialty, luxury and off-price stores as well as direct response channels.

With direct supervisory roles across every functional area within a retail operation including extensive international sourcing and operations, Appel has seen a lot throughout his career. And to his way of thinking, the industry has been overstored for 30 years and the lack of creativity in the market is only driving customers away while dwindling capital makes change difficult.

SJ: What is your take on the current environment?

MA: Retail sales are not bad; it just looks worse than the reality. Apparel and department stores are in the headlines with weak sales and store traffic, meanwhile other retail category verticals are doing just fine. Where and how consumers are spending isn’t showing up in the headlines.

For the most part, new retail concepts and brands are capturing the industry’s incremental growth. The lack of vision by traditional retailers has led to years of promotions as the go-to strategy to make a comp. Foreign-based competitors and e-commerce are exerting pressure on retail earnings at many U.S.-based apparel brands, retailers and department stores. Meanwhile, the flight to value has off-price retailers and fast fashion gaining market share.

SJ: So is your phone ringing nonstop from retailers in need of a turnaround?

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MA: By the time the phone rings, it is often too late, unless the company has enough capital to implement a turnaround plan. Historically boards and management have been able to refinance despite poor performance if they have enough collateral to secure ABL facilities. They often don’t address the core issues affecting performance until they run out of capital. That’s why we are seeing so many liquidations in the retail sector today.

SJ: When and at what ratio of online to brick & mortar, do you see the industry settling at as online increases its penetration of total retail sales?

MA: Interestingly, many digital native companies are now opening stores, as they realize that a brand expression is best in a tangible, rather than a digital forum, with sales people that know the product, the brand, the category.

In five years there will be fewer department stores and specialty apparel stores, but in addition to new brands taking over abandoned square footage in the right malls, the dollar stores, fast fashion and off-price concepts will continue to grow their footprint.

SJ: What are your thoughts on some of the latest retail business models, such as subscription or showrooms? Are they viable long-term or just disruptive today?

MA: Some will stick and others fall by the wayside. Flash sales were hot as they addressed consumer demand for a great deal within the pressure-cooker framework of a short time span with limited inventory. The problem was the model really wasn’t sustainable. It didn’t allow for the financial effect of returns, as even a great price doesn’t matter if it’s the wrong merchandise, the wrong fit. Hudson Bay Company corrected for this by allowing Gilt purchases to be returned/exchanged at Saks Off-Fifth, and this drives store traffic too. The same is true with Nordstrom’s purchase of HauteLook allowing return privileges at Nordstrom Rack. Hudson Bay recently wrote off $116 million on its $250 million 2016 purchase of Gilt as the synergies have been slow to materialize. Nordstrom did well with HauteLook, but took a similar $197 million write off on its $359 million purchase of Trunk Club.

Walmart is on a buying spree since its 2016 purchase of Men’s casual brand Bonobos at $310 million brings more than a digital native (with brick & mortar locations too), it brings Andy Dunn to join Marc Lore at Walmart. In addition to buying businesses with a different consumer base than its mass merchant base, Walmart is acquiring digital, social and marketing expertise. Many of the new models are still figuring out how to be profitable, if they can be profitable. Joining forces with established retailers can smooth the road to profitability. It is possible that these new—unprofitable—models which solve for a single use can be profitable as part of a larger organization, where—that overused word— synergies can come into play.

SJ: You mentioned a lack of vision by retailers as part of the current environment. Please elaborate.

MA: Today, we see more creativity coming from entrepreneurial startups than we see at traditional retailers. That’s a major reason why traditional department and specialty stores are suffering. They are no longer competitive, selling look-alike products but also in terms of merchandise presentation, store design, and in-store events. Its a function of running the businesses financially versus putting product and store experience first to serve their core customer. Retailers have lost sight of their competitive advantage—their merchandise point of view curated for their core customer—and succumbed to price to drive the business. The attempt to eliminate risk at the retail level works its way back up the supply chain to venders that want to avoid returns and gross margin adjustments. Eliminating risk eliminates the fashion.

SJ: What about Amazon? Every day it’s another Amazon announcement.

MA: The Whole Foods acquisition shows that Amazon understands that brick & mortar in integral to retail. They need to put stakes in the ground. It will be interesting to see how they change the in-store shopping experience. The consumer uses and will continue to use all channels on the purchase journey.

SJ: What is fundamental to spearheading a successful turnaround?

MA: First you have to have a defensible business model—with a clear strategy and clear focus around the target consumer. Then you need enough capital to provide the necessary time it will take to stabilize the business and implement the turnaround plan. You need a clearly articulated strategy that is understood across the organization. Most turnarounds take two to three years at a minimum to gain traction, though you should begin to see progress against preset milestones after year one. Most importantly, you need the right CEO and management to drive the turnaround plan.

SJ: Which retailers are on the right track?

MA: The off-price giants, TJX with its TJ Maxx, Marshalls, HomeGoods, Ross Stores, Burlington all seem to have it right in an increasingly value driven environment. Fast fashion retailers too—Zara and H&M for instance—are also winning today, as they have the infrastructure, sourcing and logistics, merchandising and design teams in place, coupled with strong balance sheets to execute global growth strategies. Niche players disrupting categories like Warby Parker are winners too. All three segments: off-price, fast fashion and niche players like Warby Parker offer the consumer incredible value and a fun shopping experiences. European retailers, Zara, Primark, H&M, Ikea and Aldi all think globally and long term, and they are disrupting the U.S. retail landscape by offering a better executed alternative shopping experience to legacy U.S. retailers who have failed to adapt.

SJ: What can U.S. retailers learn from the Europeans so they don’t need to hire a turnaround specialist?

MA: The issue about not hiring a turnaround specialist is really about how financially healthy the company currently is, and whether they have the free cash flow to give them the time to fix the business themselves. The problem for most of the troubled retailers we read about today is a cultural issue. Implementing global best practices sounds easy but often legacy management is unable to pivot from long held practices and learn to do things differently. You need management at all levels of the organization to embrace change. This ability to effect fundamental change seems sorely missing for many legacy US retailers.

SJ: Is omnichannel necessary for success?

MA: For moderate price points and above, omnichannel probably is necessary. You need an online presence, as well as mobile capabilities to communicate and establish relationships with your customers in addition to driving traffic to the stores. Millennials and Gen Z consumers expect it. But its worth noting that today, many off-price and fast fashion retailers aren’t winning because of their online presence; rather it’s the value and store experience they provide. The shopping experience isn’t necessarily about personalized customer service. It’s about product. New product arrives weekly in both formats and the inventory is shallow, necessitating frequent store visits and immediate purchases. None of that ‘I’ll think about it tomorrow’ attitude works in this model because it might not be there, forcing the customer to buy it or lose it.

The problem is that its expensive to be omnichannel when average price points are so low. Middle market companies at moderate price points and above are getting squeezed to be competitive as they invest in omnichannel capabilities.

Marie Driscoll, CFA is an industry analyst focusing on apparel brands, retailers and luxury goods and providing consulting services to academia, industry, investors and non-profits through her firm, Driscoll Advisors. She can be reached at