Bankruptcy. It’s not pretty, but it happens. And in the retail world, it seems like there’s another company filing for bankruptcy every other week. This year alone, the industry has seen 16 major bankruptcies, including filings from Charlotte Russe, Payless ShoeSource, and Gymboree, among other stores.
To be clear, retail as a whole is alive and well. Industry data shows that retail — including the brick-and-mortar sector — is doing just fine.
So why are so many retailers going under?
We took a look at some notable retail bankruptcies in 2019 and analyzed the reasons behind their filings and the lessons you can learn from them.
Forever 21
The latest — and perhaps most newsworthy — retailer to file, Forever 21 announced on Sunday that it would shutter 178 stores in the US and 172 stores in other countries. The chain announced they’ve secured $350 million in restructuring financing in hopes of reorganizing and readying for the all-important holiday season.
The brand first soared to success in the early 2000s as the go-to destination for looks du jour at bargain basement prices. With an expansive selection of accessories, footwear, and apparel, Forever 21 and its cohorts set the stage for the rise of fast fashion in the US.
Adopting a swift expansion strategy, however, Forever 21 soon outpaced itself. The retailer’s executive vice president, Linda Chang — whose parents founded the chain in the 1980s after immigrating from South Korea — told the New York Times, “we went from seven countries to 47 countries within a less-than-six-year time frame and with that came a lot of complexity.”
Meanwhile, many of Forever 21’s stores are anchored in traffic-challenged shopping malls and competition from e-commerce increases.
Key takeaway: Forever 21’s aggressive expansion strategy exists in direct contrast to today’s more successful retailers. Take, for example, Lululemon, whose slow-and-steady-wins-the-race approach to opening more doors has proven wildly successful. Or Five Below’s unconventional but highly effective approach of clustering stores closely together to simplify the supply chain.
As many retailers are now thinking small to meet the increasingly complex demands, many of Forever 21’s stores are more than 38,000 square feet, having been acquired after the recession of 2008-09. Many sit in lower-tier malls that never bounced back, and possibly never will.
When it comes to expansion, the lesson here is not only to grow at a careful clip, but to select your footprint wisely.
Payless ShoeSource
Payless ShoeSource filed for bankruptcy twice — first in 2017 when it closed 673 locations, and again in February 2019, when it shut down its US operations entirely.
Payless is an interesting case. The retailer was once a darling of the footwear industry. In the late 2000s, it had over $2 billion in sales and 4,500 stores globally. Payless offered great styles at reasonable prices and successfully pulled off partnerships with notable brands and designers, including Christian Siriano, Lesa Rose, and more.
But despite its success, Payless had a major thorn in its side: debt. A leveraged buyout in 2012 coupled with an aggressive expansion left the company with a mountain of debt that it couldn’t pay.
What’s more, consumers started to get more comfortable buying shoes online, thanks to players like Zappos which offered unbeatable return policies. Payless’ online retail game wasn’t compelling and it still did most of its business offline. As such, the retailer missed out on the ecommerce opportunity and modern shoppers opted to do business with more innovative companies.
Key takeaway: Past accomplishments don’t guarantee future successes. Payless may have done a lot of things right, but it lost sight of the changes and competition brought about by digital retail.
The company went big on the wrong things (aggressive store expansion) and didn’t invest enough in areas that would’ve made it more successful (ecommerce and customer experience). All this — along with massive debts — led to its downfall.
Another key lesson? Keep your debts in check. Owing money to creditors is almost always a part of doing business and there are certainly cases in which debt helps a company grow. But you should always exercise caution when getting into debt and spending money. Pay close attention to market trends to ensure that you’re taking on debt for the right reasons and you’re investing those funds in the areas that count.
Charlotte Russe
Charlotte Russe filed for Chapter 11 bankruptcy protection in February 2019, announcing at the time that it would close 94 of its 512 stores. The plan was to unburden itself from its debts and find a buyer who would continue the business.
That didn’t happen. A month after its filing, Charlotte Russe announced that it would close the remaining stores and its assets were sold to the liquidator SB360 Capital Partners.
Things hadn’t been going well for the retailer in the years leading up to its bankruptcy. Foot traffic to its stores declined dramatically, as the company’s marketing and merchandising efforts failed to engage its target market.
But at the core of its failure is debt. Charlotte Russe was acquired by the private equity firm Advent International for $380 million in 2009, and this deal left it with $175 million that was supposed to be paid off in 2014.
Charlotte Russe was intending to have an initial public offering to pay off the loan, but lackluster sales postponed the IPO and the retailer struggled to pay its debts.
Being in a cash crunch meant that Charlotte Russe had fewer resources to devote to innovation and the customer experience, and this further led to its demise.
Key takeaway: Private equity acquisition — particularly those that come with large amounts of debt — should be dealt with carefully. Such deals should only be made when the company has a clear vision to evolve and innovate for the future.
When Charlotte Russe was acquired, it kept on going with its traditional model and didn’t keep up with the rise of fast fashion and other changes in consumer behavior. The company didn’t get the sales it needed to offset its debt, which led to it go under.
Gymboree
In a story similar to Payless, Gymboree also went bankrupt twice — in 2017 and 2019. The first filing allowed the company to reach a deal with lenders, in which it was able to unload $1 billion in debt plus get a cash infusion of $115 million.
But this couldn’t save the retailer, because in early 2019, Gymboree filed for bankruptcy again, this time closing all Gymboree and Crazy 8 branded stores.
Why did it go under? One reason was Gymboree’s inability to outperform other retailers. The company was up against other kids apparel stores like The Children’s Place, but it also faced competition from the likes of Target and T.J. Maxx, which had their own children’s departments.
And much like the other retailers in this article, Gymboree was also dealing with debt. Bain Capital acquired Gymboree in 2010 for $1.8 billion, straddling the company with huge amounts that it had to pay off. At the time, Gymboree also set out to open thousands of stores globally, stretching its resources even more.
Key takeaway: Just like with Payless and Charlotte Russe, a big lesson that retailers can learn from Gymboree is to be careful with debt. Having enough cash in the bank is extremely important, particularly in today’s fast-changing retail environment which requires companies to be nimble and innovative. That’s difficult to do when a business burdened with debt, and it could eventually lead to a company’s downfall.
Avenue
In August 2019, the plus-size apparel retailer Avenue announced that it would be closing all of its 222 stores in 33 states. Prior to the official announcement, Avenue employees received notices about the store closures and were instructed to stop selling gift cards and to not accept returns.
Avenue’s woes stem from a being in a highly competitive market and a failure to truly connect with its core customer base.
Retailers across the spectrum — from low-priced merchants like Walmart and Target to specialty stores like Anthropologie and White House Black Market — have beefed up their plus-size offerings. And let’s not forget online players like ModCloth and Gwynnie Bee, which made waves in the plus-size space thanks to their strong marketing and messaging around inclusion and diversity.
Throughout all this, Avenue has largely remained stagnant and failed to come up with a strong point of differentiation. Its customers flocked to more distinctive brands, and the business suffered.
Key takeaway: It seems like Avenue was unable to forge a strong enough connection with its customer base. There was a time when plus size women didn’t have a lot of options, and Avenue took this for granted, failing to build real shopper loyalty.
So when other players entered the plus-size market, consumers were quick to abandon Avenue for better options.
Let this be a cautionary tale for other retailers. Your point of differentiation shouldn’t be something that other merchants can easily copy (i.e, selling similar stuff). To thrive, you need to find ways to truly connect with your customers and ensure that they will continue buying from you even when other players crop up.
Barneys New York
Barneys filed for bankruptcy in early August, announcing that it will focus on running just five stores. The Barneys on Madison Avenue, downtown Manhattan, Beverly Hills, San Francisco, and Copley Place will remain open while those in Chicago, Las Vegas, and Seattle will close their doors.
According to CNBC, the retailer raised $75 million to “support a sale process.” What happens next remains to be seen.
Barneys’ problems can be attributed to a number of things. For starters, more and more luxury brands are encouraging shoppers to buy directly from them rather than department stores. What’s more, online competitors such as Net-a-Porter and Moda Operandi are taking market share.
Barneys also faced a steep rent hike this year, when its Madison Avenue rent increased from $16 million to $30 million in January of this year.
To top it off, Barney’s failed to evolve with consumer behavior and sentiment. In spite of the increasing calls for more inclusion and diversity, the retailer remained exclusionary by continuing to carry limited sizes, and at one point engaging in racial profiling.
Key takeaway: Evolving with the times isn’t just about adopting new technologies. We’re going through massive societal shifts, and retailers should respond accordingly.
Merchants that carry other brands and designers should also stay on their toes. As brands continue to sell directly to consumers, retailers must work harder to build relationships with customers and drive traffic to their stores.
Final words
One thing that all these bankruptcies has taught us is the importance of keeping up with the habits of consumers along with societal changes. That being said, accomplishing that is a lot harder when retailers are struggling to meet their financial obligations.
That’s why in the coming years, the retailers that will thrive are the ones that are able to keep their balance sheets clean. Keeping debts low, coupled with a thirst for innovation, are two important keys to retail success.
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