2019

THE CHANGING RETAIL MARKETPLACE: A Lender’s Guide to Evaluating a Retailer’s Chance of Success

The retail landscape has changed and savvy retailers are adapting their businesses to meet the needs of 21st century consumers. Glenn Sniezek explains the signs that lenders should look for to determine if a retailer is worthy of continued support or if the cord needs to be cut.



Glenn Sniezek
Director
Dacarba

Many retailers have been forced to shutter their doors in recent years because of challenges in the industry. These include some of the most iconic brick-and-mortar storefronts, many of which have graced towns and cities for decades. Changing shopping habits, along with years of overly aggressive store growth, have tolled the death knell for many retail businesses.

Last year, 16 U.S. retailers filed for bankruptcy or announced liquidation plans. In 2017, 21 retailers filed for bankruptcy.

“Business as usual” is not an option in the retail sector. To succeed and compete in 2019 and beyond, businesses will need to adapt and meet evolving market dynamics. To avoid filing for bankruptcy or being swallowed up by competitors, retailers will need to offer a more personalized shopping experience and integrate modern technologies that enhance customer service as consumers and retail brands become more interconnected.

Below are three key trends to watch out for that will likely re-shape the retail sector in 2019 and beyond.

Experiential Retail

As consumers choose to invest in experiences rather than products alone, retailers will need to respond by meeting the growing demands of their customers. This, in turn, develops customer loyalty, which is top-of-mind for retailers that are looking to get a jump in today’s on-demand economy. Apple’s fan base waiting for the next iPhone to arrive is a good example of this dedication to a brand that results in increased sales.

IoT & Cognitive Computing and AI

Digital technology can enhance a retailer’s ability to attract customers for a more personalized shopping experience. For example, retailers can leverage IoT (Internet of Things) technologies found in everyday products like home speakers, TVs, and cars to collect data to provide insight into their customers’ product usage and buying habits. Retailers can also implement cognitive computing into their customer support technology to enhance customer service or leverage Artificial Intelligence (AI) to monitor everything from consumer purchasing habits to AI-powered chatbots for better one-on-one service.

Automated Retail

Self-service, standalone kiosks that operate as fully automatic retail stores through the use of software integrations to replace the services inside a traditional brick-and-mortar store are rapidly gaining traction in the retail sector. RedBox for movie rentals and KeyMe for key duplication are two examples. We will likely see more rollouts of automated shopping concepts implemented in shopping malls and city courts in 2019 and the years to come.

Lenders who have provided financing for traditional retailers will need to be diligent in monitoring the actions taken by management to identify and implement these trends. As traditional retailers struggle to stay relevant and transform their businesses to meet the changing market dynamics, lenders will have tough decisions to make as sales decline, margins shrink and liquidity tightens for their portfolio companies. As such, lenders should ask the following questions as retailers attempt to adapt to changing market dynamics:

• Do I provide waivers when covenants are broken?

• Do I equitize my debt?

• Do I provide new capital to the business (whether inside or outside of bankruptcy)?

• How do I protect my collateral?

Understanding these trends and how they will help lenders’ portfolio companies to regain/improve profitability will be critical to making these decisions.

Warning Signs for Lenders

If you do not see a retail business taking the steps necessary to change its strategy to increase traffic, expand the shopping experience and utilize technology to improve margins, then it is highly likely that a bankruptcy filing may be inevitable. This could ultimately lead to a sale or liquidation of the business. For asset-based lenders, this means taking steps as early as possible to protect collateral; in many instances, inventories and other assets will only generate pennies on the dollar. Unsecured lenders may recoup a minimal amount, at best, on their investment.

Lenders need to be aware of the market trends so they can try to take steps as early as possible to protect their collateral and investments. It may be prudent to make the tough decision early on before the business further deteriorates in the hope of a market turnaround or change. Unfortunately for many retailers, the changes in the market appear to be permanent as consumers are now more demanding of brands and drawing them to a physical location is a challenge, given the online shopping alternatives.

If the business is taking the appropriate steps to transform its retail locations, then a lender needs to weigh the benefits of providing support through covenant relief or by converting debt to equity in the business. Given the alternative of liquidation, this can provide a good opportunity for a lender to maintain its asset base while opening up an opportunity for a better return on investment. The lender, however, will need to do its homework to determine whether the retail company can execute the plan.

Difficult Decisions

The hard part for a lender is that many retailers will require significant investment or deleveraging to transform their business models to remain competitive. A review of the company’s business plan and branding strategy will provide some insight into whether the company has the vision and expertise necessary to bring a traditional retailer into the 21st century. If this business plan does not include utilizing technology to enhance the buyer experience, provide virtual shopping and automate processes to lower costs, coupled with a plan for improved store shopping experiences, then it is likely to fail in the current market environment. However, if the plan includes these aspects, then a struggling retailer could survive this changing market environment and eventually thrive in the marketplace as weaker competition goes away. This will allow existing lenders to preserve their investment.

Given the current environment and the fact many of the marketplace changes are likely going to be permanent, the trend in retail bankruptcies will probably continue. While high risk, those companies that can successfully execute a transition from the traditional brick-and-mortar model provide a great opportunity for lenders to provide financing and make a high return. The old adage of “risk vs. reward” is more than evident in the retail marketplace during this transition period. Time will tell, however, which companies become extinct like the dinosaurs and which will adapt and survive the changing retail marketplace landscape.•