Rise of the Zombie Retailers - SolidRumor.com

Rise of the Zombie Retailers

 Rise of the Zombie Retailers

Just months after liquidating its assets in bankruptcy, Century 21 is back from the dead.

The company plans to open a new store this summer in Busan, South Korea. Its original business model, selling overstock designer clothes at discount prices, will remain largely intact, according to president Marc Benitez. A return to New York, the retailer’s hometown of 60 years, is a possibility.

Century 21 was one of dozens of retailers to file for bankruptcy during the pandemic. Storied names from Brooks Brothers to J.Crew to Neiman Marcus could not adapt to the massive shift from physical retail to e-commerce last year or lacked the cash to power through a months-long sales slump. The debt they had accumulated in the years prior to the pandemic helped seal their fate, as money that could have been spent modernising stores or investing in online shopping was earmarked for creditors instead.

These retailers and many others exited bankruptcy largely intact, often under new ownership. Though they may have refinanced their loans and closed a few underperforming stores, in many cases little else has changed.

“[It’s] not a fresh start but business continuity,” Benitez told BoF. “I’m not quite sure there is a big difference in what we are doing today with what we were trying to do a year ago.”

The pandemic was supposed to be a reckoning: a back-to-square-one moment that forced global chains and digital start-ups alike to reassess their businesses. Many also predicted a culling of the weakest retailers, the ones that had tried and failed for years to stem declining sales and mounting losses.

Instead, the pandemic added to the ranks of “zombie” retailers, companies that have just enough cash coming in to stagger on without ever fully rebounding or shuttering. Sears is the ultimate example: after decades of decline and a 2018 bankruptcy filing, it still operates dozens of stores.

“These are businesses you probably assume don’t have a place in today’s society but oddly enough, they’re able to crawl along because the cost of running the business is generally self-sustaining,” said Simeon Siegel, a retail analyst at BMO Capital Markets. “Their reason to exist doesn’t have to be grand.”

Some experts argue that zombie retailers can hurt healthier competitors. The undead chains lure customers with deep discounts instead of exciting new products, forcing rivals into a race to the bottom that squeezes margins and saps cash that could have gone toward innovation. American malls are filled with chains analysts frequently refer to as zombies, including PacSun, Express, J.Jill and Chico’s.

Their reason to exist doesn’t have to be grand.

Zombies have their fans, however. Every J.C. Penney or Forever 21 that remains open supports employees, vendors, suppliers and landlords. Should they close, it would throw tens of thousands of people out of work. Empty storefronts can also harm the health of malls, dragging down still-vibrant neighbours.

“We’re looking at an enormous array of interconnected effects that have to be sorted out somehow,” from unemployment to foreclosures to a shrinking tax base for local governments, said Mark Cohen, a professor at Columbia Business School. “When business failures pile up in a given industry, it creates havoc.”

The Dead Don’t Die

The rate of retail defaults last year was about 20 percent — a significant jump from years prior, according to Moody’s analyst Raya Sokolyanska. In 2021, however, the rate is projected to recover to about five percent, in part because many of the worst-off companies have already gone through the bankruptcy process, she said.

This is also because many companies have taken advantage of ultra-low interest rates to stockpile cash. Macy’s, for instance, is considering a debt sale that would give the retailer access to more liquidity, Bloomberg reported last week. Earlier this month, companies with credit rated as “junk,” labelling them a high risk of default, saw their average borrowing costs hit a record low.

A number of government policies have helped create a safety net. Forbearance on rent and foreclosure has helped brands negotiate with their landlords. The Biden administration’s stimulus package includes expanded unemployment benefits.

The question remains as to how long these policies could be kept in place.

“The government needs to create a ramp to recovery rather than a cliff if and when these protections fall off,” Cohen said.

Return of the Living Dead

For many troubled retailers, these protections only forestall the inevitable.

Companies that have emerged from bankruptcy have less debt and owners with plans to wring profits out of their new properties, even if their ideas for luring shoppers back are sometimes hazy.

Authentic Brand’s Group and Simon Properties acquired Brooks Brothers out of bankruptcy last year, but beyond announcing they would streamline its footprint of about 500 stores worldwide, the joint venture offered little insight into how else it would transform the 200-year-old menswear retailer. J.C. Penney was acquired by Simon and fellow mall operator Brookfield Properties, who say they plan to improve the department store’s e-commerce offerings.

Positioning a tired brand for long-term success is difficult, however.

“As long as the 20 million middle America, lower-income consumers between the ages of 45 to 65 are willing to shop at these brands, for now, the business will be fine,” said Matt Katz, managing partner at business advisory firm SSA & Company, who was the interim CEO of Forever21 during its bankruptcy proceedings. “But at some point, that group will be today’s 20- and 30-year-olds. Will that person have the same affinity?”

When that day comes, retailers may find themselves back where they started. The industry has already seen its share of “chapter 22s,” companies that end up filing for bankruptcy twice, such as Charlotte Russe and Payless ShoeSource.

“Companies that filed for bankruptcy that emerged with nothing but an improved debt load are only buying themselves time,” said Siegel.

Sometimes survival of the fittest is a good thing.

Even as an old generation of retailers endures, the pandemic has set the stage for a new era. The cost of entry into the fashion industry has never been lower. The number of new business registrations in the US grew by nearly 25 percent in 2020 compared to the year prior, with online stores as a leading category, according to Bloomberg.

“Sometimes survival of the fittest is a good thing,” said Vincent Chin, a professor at the Fashion Institute of Technology. “You get one chance, you get two chances and that’s it … The fastest, most nimble one with a younger clientele will prevail.”

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