Retail Bankruptcy: Gradually, Then Suddenly

JC Penney, J. Crew, Neiman Marcus, Pier One – all announced bankruptcy in the past couple of weeks. That’s after Lucky’s Markets, Earth Fare, Macy’s, and Mattress Firm and others filed. The list will only grow – we’re only five months into 2020.

 In 2019, 16 of the 25 retailers that filed ended up liquidating. So far this year five of the 15 have plans to liquidate.

Many of these companies blame the pandemic lockdown for their failures. Others blame Amazon, or online shopping in general, or millennials. What’s interesting is that none of them blame poor management, bad decisions, or a lack of a coherent strategy.

“How did you go bankrupt?,” Bill asked.

“Two ways,” Mike said. “Gradually, then suddenly.”

This is a well-known and oft-repeated quote from Hemingway’s The Sun Also Rises. As is true with much of his work, there is a much deeper meaning than the surface humor. The line is actually about change, and how we adapt to it. We develop bad habits or make poor decisions. When those don’t have immediate ill effects, we make more bad decisions and develop bad decision-making habits.

Those poor choices might be financial, or health-related, or about our relationships. The process is similar for each. But we’re talking about business here, so we’ll stick to that.

Gradually then suddenly is how many public companies end up in bankruptcy court. They put the focus on this quarter’s results, losing sight of the long-term. Soon it becomes a habit: making decisions that impact the short-term, while the underlying health of the company begins to erode as inflating the stock price becomes the only goal.

Much as it is with a poor diet or not exercising, the effects aren’t immediately apparent. Over time, the impact of poor decisions starts to have a multiplier effect, and by the time we figure out that something is really wrong, it’s too late. We get a cavity, or have a heart attack – or we can’t pay our employees.

Chapter 11 bankruptcy allows the filing company to “reorganize.” This generally means restructuring debt loads that have become unmanageable. A committee is formed to represent the interests of creditors and stockholders, and a plan is created to help the company emerge as a profitable entity.

What is frequently missing from the restructure process is a change in company leadership. Those who got the company into this mess are frequently left in place to supposedly make better decisions. But old habits die hard, and the success rate for post-bankruptcy is less than 50 percent.

Once a company declares bankruptcy, everything should be on the table. Anything that was in place before should be required to prove that it will contribute to the future success; this includes senior management and the board of directors. But often the exact opposite happens: those on whose watch the failures multiplied are offered stay-on bonuses when in reality they ought to be the first out the door.

Amazon is often at the top of the list for the retail failure blame game. While it’s true that online shopping has changed the landscape, that change isn’t strictly Amazon-led. The company gets about 36 percent of online shopping orders, which is down from 42 pre-pandemic.

Amazon has seen a significant drop in sales since the start of the pandemic crisis as its supply chain was overwhelmed and delivery times went from overnight to “maybe next week.” This exposed a crack in the Amazon fortress; its shoppers were more than willing to go elsewhere when Amazon couldn’t provide what they wanted. So much for loyalty.

Walmart and Target have both seen solid gains for online shopping. Best Buy has been able to successfully reinvent itself in a category that is famously online-centric. But its entire business model changed.

But Amazon, along with Best Buy, is playing the long game. Both make investments that may not pay off for months or longer, but that help to build solid foundations for the business. They take a customer-centric view and haven’t been afraid to change things wholesale when it was necessary.

The real problem for retail isn’t online shopping, or Amazon, or millennials. The problem is failing to understand and adapt to the changes that have always been part of retail. History is full of those who didn’t adapt to change – from the British Army during the American Revolution to railroads to Blockbuster video.

Pier One has already announced it plans to liquidate. JC Penney is taking a different tack, eager to emerge as soon as possible. But unless the underlying cause of the failure is addressed – sales have been in decline for 20 years – then this step only serves to prolong the inevitable.

The real question is what will change at JCP? How will the company become relevant to shoppers who have long since lost interest? What miraculous offering is in development that will have shoppers lining up to get in? Those same questions apply to Neiman Marcus, J.Crew, Macy’s and so on.

Unfortunately, the likely answer to “what will change” is: “Not much.” And in 12 or 24 months, we will be talking once again about the sad decline of a once-great retailer that is now gone forever. Gradually at first, then suddenly.