What Happened to Forever 21? 3 Missteps That Led to the Retailer’s Downfall

Forever 21 has filed for Chapter 11 bankruptcy protection following weeks of speculation about the future of the once-prolific American fast-fashion retailer.

Late last night, the company announced plans to close up to 178 of its 500-plus outposts across the United States, as well as exit most of its locations in Asia and Europe. (It will continue operations in Mexico and Latin America.) The firm said it expects to continue business as usual — honoring gift cards, returns, exchanges and sale purchases — supported by $350 million in financing to aid in restructuring efforts.

“This does NOT mean that we are going out of business; on the contrary, filing for bankruptcy protection is a deliberate and decisive step to put us on a successful track for the future,” Forever 21 wrote in a letter to customers. “We are confident this is the right path for the long-term health of our business. Once we complete a reorganization, Forever 21 will be a stronger, more viable company that is better positioned to prosper for years to come.”

The bankruptcy comes at a time when a shift to e-commerce and broader brick-and-mortar downsizing have led to the downfall of many physical retail players.

Forever 21 joins the swelling list of companies — including, recently, Barneys New York — that have used Chapter 11 protection as a means to rightsize its fleet of stores and overhaul its business strategy. (According to advisory firm Coresight Research, U.S. retailers have already announced 8,567 store closures so far this year, compared with 2018’s 5,844 shutterings.)

Here are three of the biggest challenges that befell Forever 21 leading up to its bankruptcy.

Supersized Stores

Founded in 1984, Forever 21 lured in young shoppers with its offering of low-price merchandise, including tops for $5 and shoes for under $30. Its affordably priced selection became even more appealing after the Great Recession in 2008, when the retailer found itself expanding more rapidly.

Now, the company has 541 locations in the country, including many supersized stores, such as its four-story, 90,000-square-foot flagship in New York’s Times Square. More than 70 of its locations exceeded 35,000 square feet, according to its filing. Forever 21 had even acquired spaces from some of America’s largest department stores, including Saks Fifth Avenue and the now-bankrupt Sears.

This ambition — which happened at a time when other retailers were trimming their physical footprints during the steady rise of e-commerce — ultimately helped lead to Forever 21’s demise, explained Jane Hali, CEO of retail investment research firm Jane Hali & Associates.

“Forever 21 once said they wanted to be the new department store — that is a mistake in itself,” she said. “Their large stores have been the key to their downfall. … Fast fashion has its place in the competitive retail mix, [but] the key here is the amount of stores and the square footage.”

Mounting Debt

In its bankruptcy filing, the company noted that it had employed 43,000 people and recorded $4.1 billion in annual sales at its peak. It also noted that its estimated assets were on par with liabilities in the range of $1 billion to $10 billion.

Over the years, amid the rise of e-commerce and fast-fashion competition from the likes of Zara and H&M, Forever 21 had fallen victim to declining store traffic and profitability issues — challenges that also showed up abroad. Court filings reveal that its stores in the U.S., as well as in Europe and Canada, lost an average of $10 million a month over the past 12 months, with overall sales shrinking to $3.1 billion for the fiscal year ended July 2019.

“Forever 21 opened stores at the beginning of the upswing of fast fashion, and they were able to capitalize on the upswing,” explained Farla Efros, president of consulting firm HRC Retail Advisory. “Quickly they began to open stores, more like mini-department stores that were too large and quickly became unproductive. Given the growth of online [retail] at the same time, the larger boxes became quite undesirable to the consumer. The infrastructure cost became too expensive.”

According to the court filings, the retailer is in talks with its biggest landlords to discuss rent reduction and store closures. (Four of them hold nearly 50% of its leases.) It has also reached deals with roughly 130 vendors ahead of its bankruptcy filing, in a bid to minimize the disruption to its supply chain before the critical holiday season.

Shifting Consumer Preferences

In recent years, millennial and Gen Z consumers not only have increasingly patronized online shopping platforms, but their growing environmental consciousness has led these cohorts to choose brands and retailers that provide sustainable offerings.

Forever 21 has made an effort toward social responsibility, including switching to 100% recyclable carryout bags and reducing carbon emissions in product transportation, on top of donating more than $11.5 million worth of merchandise three years ago. However, the company’s push to become more eco-friendly may have come too little too late. In addition to competing with fast-growing resale and rental services — which help reduce waste by recycling gently used garments — the retailer also had to contend with numerous sustainable fashion startups.

“Customers are pushing more for transparency in the supply chain and sustainability of the products they buy,” said Ray Wimer, assistant professor of retail practice at Syracuse University’s Martin J. Whitman School of Management. “They also tend to lean more toward renting, reusing or sharing clothes. Consumers are also moving more toward online shopping and away from the shopping mall in general.”

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