Last year, the coronavirus pandemic led dozens of retailers to file for Chapter 11 protection or scale down their brick-and-mortar footprints. But even with COVID-19 vaccinations and fiscal stimulus on the way, some experts are concerned that more bankruptcies and store closures could plague the retail sector in the year ahead.
According to financial advisory services firm BDO USA, the first month of 2021 already saw four retail bankruptcies, including women’s clothier Christopher & Banks — and the first half is expected to see even more Chapter 11 filings, albeit at a slower rate than 2020, which recorded the largest number of bankruptcies since the financial crisis more than a decade ago. As for store closures, the firm reported that 36% of retailers plan to eliminate or consolidate their floor space as a means of cost optimization and 31% intend to reduce their mall-based locations.
“You’re going to see more store closures this year than bankruptcy filings, but it won’t be anywhere near the numbers we saw in 2020,” said David Berliner, leader of BDO’s restructuring and turnaround services practice. “Retail is getting concentrated in fewer and stronger players across certain sectors, [and] there are still going to be some losers if COVID lingers on.”
Here, what experts say could worsen those challenges for some retailers and push them to the brink of bankruptcy or mass shutdowns.
A weak financial cushion
In the fall of 2019, a BDO survey found that 83% of CFOs anticipated an increase in revenues over the following 12 months. Then, the health crisis struck, affecting the cash flow of retailers both big and small. Many companies faced a shortage of liquidity, became overburdened with debt or weren’t in a position to secure outside capital. Unable to invest in product development, marketing efforts and more aspects of their business, they were slow to pivot to consumers’ needs.
“The strong get stronger, but it’s very hard for those retailers that are weaker to keep up because they’re spending money that [their stronger counterparts] are using to improve their websites and build contactless systems that customers now seem to want,” Berliner told FN.
On top of widening the divide between smaller players and big box giants (think Walmart and Target), the outbreak has accelerated the shift to digital and omnichannel services, like buy online, pick-up in store and curbside pickup — trends that experts say are likely to remain popular post-COVID-19.
“Regardless of whether they are brick and mortar or e-commerce, retailers need to focus on where consumer demand is in order to survive the pandemic,” said Jen Rapp, VP of brand and communications at marketing automation platform Klaviyo. “The shift in shopping trends certainly shows how consumer habits are changing, the challenges that physical retail is facing and how brands will need to innovate in order to survive.”
A dependence on mall space
Prior to the health crisis, many shopping centers were suffering declines in foot traffic and uneven momentum. As the outbreak made its way across the U.S., visits to malls came to a near standstill amid government orders that mandated the temporary closures or limited the capacities of nonessential stores.
Last year, at least a dozen mall-based retailers — some of them anchor tenants at those shopping centers — filed for Chapter 11 protection: In the first half of 2020, JCPenney, Neiman Marcus and J.Crew were among the boldface names that went bankrupt, while the second half saw the bankruptcies of Brooks Brothers, Francesca’s and Lucky Brand, as well as Lord + Taylor parent Le Tote and Ann Taylor owner Ascena Retail Group.
Many of these tenants have also exited malls, which have been left with an increasing number of vacant spaces that can make them less attractive. A dearth of stores — and large, unfilled anchor spaces — can become an impediment for retailers that remain in such malls either by choice or because they’re stuck in long-term leases they’re unable to abandon. Shopping centers themselves have also been vulnerable: In November, two major mall owners — CBL & Associates Properties Inc. and Pennsylvania Real Estate Investment Trust — filed for Chapter 11 protection amid a sharp decline in shopper visits and challenges with tenants paying rent.
“[Retailers] don’t want to be totally dependent on indoor shopping malls anymore,” Berliner said. “In addition to increasing e-commerce, they’re also starting to look at moving to off-mall locations as they restructure their business models. They may not need stores that are as large as what they used to have, and having fewer and more targeted stores will enable more flexibility.”
Many of those companies downsized their brick-and-mortar fleets — a move also made by retailers with healthy balance sheets that sought to move to off-mall locations or go smaller in format, while leveraging their omnichannel services or upping investments in their e-commerce platforms.
“In some industries or for certain products, an in-person experience can be important in either being used as a showroom before an online purchase or providing an opportunity for someone to try a product before making a purchase.” Rapp explained. However, she added, “online retailers are already one step ahead of brick-and-mortar stores, so those transitioning to e-commerce for the first time will be faced with the most challenges as they work to test different methods in order to recreate that in-store shopping experience.”
According to Moody’s Analytics, the bankruptcy filings and store closures of such retail tenants contributed to record-high vacancy rates, which spiked to 10.5% by Q4 2020 — the highest in two decades and up from 9.7% in the prior year period. Coresight Research also estimated that a quarter of the U.S.’s roughly 1,000 malls will shutter over the next three to five years as previously vacant spaces could be repurposed as healthcare facilities, distribution centers and other non-retail uses.
An onslaught of returns
For some experts, the amount of returns experienced by beleaguered retailers could become their tipping point toward bankruptcy. According to a survey from the National Retail Federation, consumers returned an estimated $428 billion in merchandise last year — roughly 10.6% of total U.S. retail sales in 2020 as a whole. On average, retailers anticipate that 13.3% of merchandise sold during the holiday shopping season — or an estimated cost of $101 billion — will be returned.
Plus, although the total rate of returns is in line with recent years, the trade group noted online returns more than doubled last year from 2019 and is considered “a major driver of the overall growth of returns.”
“Returns inevitably occur, and that can really play on the bottom line. We still haven’t seen all the final results — what the profit and loss looks like — from the fiscal year ending in January,” Berliner said. “[What’s more,] the first part of the year is usually about restocking for spring, but with the recent supply chain disruption, some stores don’t have the right merchandise, and that could be a cash flow hit for those that are struggling. There could be some [bankruptcy] filings because of events such as those.”