LIQUIDATORS: SHUT WEAK LOCATIONS FAST
NEW YORK — Closing underperforming stores is increasingly becoming a regular part of a retailer’s life, and usually, the retailer is better off as a result.
Liquidators, who still do a chunk of business handling the closing of stores in bankruptcy proceedings, said retailers are more frequently tapping their services to shut stores in “strategic liquidations” outside of bankruptcy court.
This point was made by the liquidator-consultant participants in WWD’s latest Financial Forum discussion.
Robert Sager, president of Gordon Bros., said he believes that one of the reasons there are fewer distressed situations currently is that retailers are being “more and more proactive” in dealing with issues such as underperforming stores.
Alan Cohen, chairman of Alco Capital Group, calls these more frequent liquidations “early corrections.”
“It doesn’t mean they have to be losing money at the stores, but the stores just have to be not performing up to standards,” Cohen said.
Sager said that smart retailers are abiding by what he described as the “80/20 rule,” which calls for retailers to concentrate on the “20 percent” most profitable parts of its business and not getting fixated on turning around the parts that are lagging.
“Most retailers focus on the 80 percent that’s not contributing, and that’s exactly the wrong thing to do,” said Sager. “Time and time again, you see some small percentage of the stores or inventory or assets in general contributing most of the value. It’s usually a small percentage, and identifying that small percentage can really make all the difference in the world.”
Sager said many retailers’ use of this approach has caused liquidations to become a more strategic means of operating a business rather than an end in itself.
“You have to constantly deal with what becomes obsolete and invest in the new locations, new inventory, new process, new technology. The ones that understand this circumstance and deal with it proactively are the ones that continue to thrive and move forward,” Sager said.
Sager said retailers that don’t home in on the fundamental strengths of its operations start to blame the weather and the economy and find other excuses, such as consumers glued to television sets during the Summer Olympics or Princess Diana’s funeral.
“It’s unbelievably detrimental, because people have these convenient bogey men, and they don’t deal with real problems,” Sager said.
Paul M. Buxbaum, president of Buxbaum, Ginsberg & Associates, Encino, Calif., said many retailers are too slow to accept the fact that a store needs to be closed or a division needs to be shut down.
“People tend to hang onto things or get used to normal standards and the way they operated in the past, and say, ‘Hey, it’s worked like this for years, so it can continue to work,’ ” observed Buxbaum.
Rampage, the junior manufacturer that filed a Chapter 11 petition in August of this year, is a good example of a firm that grew too fast and lost track of its best assets, according to Buxbaum.
“The company over the last three or four years has changed dramatically from a very small business to a very large business driven off many different approaches. Some of those approaches really never worked, but they never really stopped to look at each piece of the puzzle,” Buxbaum said.
Buxbaum, who has been hired to manage Rampage’s reorganization, said Rampage has already sold its retail business, which never took off, to Charlotte Russe, and is finding some success in focusing on its top wholesale brands.
Cohen said retailers should make a hard decision each time a store lease is set to expire on whether the store is worth renewing or not. He said companies can also work deals with landlords if the lease is not coming up, and said liquidators have sometimes taken over leases.
Said Cohen, “Many companies go into Chapter 11, and all of a sudden liquidate 100 of their 300 stores. If they had focused on those issues early on, there might have been five closings on average per year.”
Sager noted Kmart has closed some stores recently, not because they were bleeding, but because a more efficient Super Kmart was opening two miles away.
Gordon Bros. is currently liquidating Woolworth’s general merchandise stores. Sager said although the chain lost money, the closings made even more sense because Main Street, where the stores are located, has recently seen a revival.
“These stores had great location written all over them, but they had the wrong merchandise inside,” Sager said. “There weren’t places needed for selling needles and threads or goldfish anymore. They need to sell sneakers in there, and in some cases, they need to have restaurants there.”
Sager said the need to close stores more quickly than in the past is more critical because of the rapid pace of change.
“The quantity and pace of change is mind-blowing,” said Sager. He said that the ability to deal with rapid changes, which could involve lifestyle, family, technology and the way a business finances itself, will be the key to success for retailers.
“When you get it right at retail now, there’s huge opportunity to really make a financial bonanza. It’s very difficult to get it right because you have to be nimble and be able to deal with all that very, very incredibly rapidly changing circumstances,” he said.
Buxbaum said liquidators can help retailers gain a better grasp on evaluating the underperforming parts of the business because they are trained in working in the short term.
“A retailer’s short-term thought might even be between 90 and 120 days; our short-term thoughts are tomorrow,” said Buxbaum. “When one of us buys a liquidation in a bankruptcy today, tomorrow it’s our problem. So, when you take a company that’s in trouble, you look at where the problems lie and see how you can maximize this company going forward, with the end result of gaining a profit sooner instead of a long, protracted engagement.”