Sinking Ships: Common Elements in Failed Retailers

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It is somewhat ironic that while the USA is in the middle of a steady (albeit lackluster) recovery from the devastating great recession of 2008, recent years have been not too short of disastrous for many national and regional retailers. A careful study of the principal similarities in closed retailers should give industry insiders cause for both hope as well as sober reflection.

Retail bankruptcies for 2017 are already equal to those of all of 2016, with Sports Authority and Payless being only the latest national retailers to announce liquidation. And while many others continue to close stores in a desperate effort to survive in this economy, the overriding question among most retail executives is “What in the world is going on?”

Is E-Commerce a Tsunami or a Surfing Opportunity?

It is a secret to absolutely no one that chief among the similarities in closed retailers is the impact of e-commerce. Consumers are increasingly choosing to shop from their couches rather than going to the mall to shop. In hindsight, it is now easy to see that failure to adapt to evolving consumer preferences in this regard underlay the demise of several national retailers – such as Borders Books and Circuit City.

Yet while many dismiss these failures as victims of the elephant in the room (Amazon) and its conquering presence in e-commerce, the survival of competitors such as Barnes and Noble and Best Buy demonstrate that such a conclusion is an oversimplification of a more complex phenomenon.

The fact is that all national retailers exist in the same world which is now so heavily impacted by e-commerce. It clearly cannot be the sole reason as to why some retailers fail and others survive.

Similarity Illuminates Difference

Perhaps the most helpful aspect of understanding some of the key similarities in closed retailers is that such an overview is helpful in avoiding joining their ranks. With that framework in mind, let’s take a look at some of the most notorious areas of commonality shared by many national retailers that have disappeared in recent years.

Reliance on cutting instead of growing –

A core component of many similarities between closed retailers is that virtually all of them attempted to weather tough economic waters by reducing their physical location counts in order to fend off the competition from e-commerce. But deeper analysis has indicated that this may indeed be a counter-intuitive response to the competitive challenge presented by e-commerce. Instead of being a drain on resources, brick-and-mortar stores often represent valuable marketing vehicles for their own e-commerce response. They do this by both keeping their brand in shopper’s minds as well as by stopping a death spiral before it begins. Briefly stated, reducing physical retail presence can tarnish a brand in consumers’ eyes and initiate a business strategy that is more dependent upon cutting than growing.

Minimizing the “Omni-channel” –

Most national retailers who have gone out of business in the face of e-commerce competition have attempted to make their own shift to e-commerce while reducing their brick-and-mortar footprint. But others have responded by using sales tactics that use e-commerce and brick and mortar to complement each other. This tactic is more frequently referred to as “omni-channel”. This is best understood by looking at national retailers such as Home Depot, which have which developed a strategy to enable customers to choose a product online and pick it up at a store. Shop online / pick up in store and shop in store, buy online are basic examples of this, but omni-channel at its best involves creating the seamless experience between online and offline shopping.  This includes highlighting, synchronizing, and even customizing any print materials, desktop and mobile experiences, and in-store experiences.  This way, they reach the customer when and where the customer is ready.  Retailers who have failed to invest in omni-channel find it hard to keep up with those who do – particularly in this rapidly changing world of commerce.

Running out of cash –

One of the most striking (and surprising) similarities in closed retailers is that they were in fact profitable at the time of their closure. So with that being the case, what caused it? Well, the answer is a simple yet basic business error. Basically, a failure to have enough cash on hand. In the missteps leading up to retail failure, poor cash management is often the precipitating element that forces the doors closed. Even though the balance sheets show a profitable enterprise, mismanagement of cash on hand is all too common. This error can leads to things such as deterioration in relationships between the store and its lenders, increased reliance on loans containing higher interest rates and finance charges, and an erosion in the relationship between the store and its suppliers which results from irregular payments.

Out of balance inventory –

One of the final similarities in closed retailers, and one which goes hand in hand with the cash issue, is losing control over inventory. It is somewhat ironic that the very element that is the engine of most retailers’ business model is also the biggest cash sponge. So we see a vicious cycle ensuing when an inventory is dangerously out of sync with demand in the presence of cash management problems. This can quite often be the death knell of an otherwise thriving retail establishment.

At the end of the day, every retailer can learn from conducting a close examination of both the similarities and critical differences amongst closed enterprises.

Above all, avoiding the trap of cutting in order to grow stands out as a practice to avoid. That simple change in perspective alone has been shown to be effective in turning around the fortunes of several retailers nearing the edge of liquidation.