It looks like many retailers have been able to weather the Great Recession as a result of tactics initiated in early 2009.
Most retailers took a very conservative approach by keeping inventories low, focusing on efficiencies, delaying or canceling store growth, and in some cases contracting their store base as lower consumer demand rendered marginal locations unprofitable.
So far in 2010 same-store sales are generally up, although the discounters that were the better performers in 2008 and early 2009 have seen a reduction in their positive comps. There are also some retailers whose strategies and business models were under duress prior to the economic meltdown, and the tough economy has only made things worse for these players. Nonetheless, it looks like most retailers came out of 2009 in better shape than expected. We see this in our own portfolio, where most clients are much more liquid than they were a year ago.
This year retailers are at a strategic crossroads. How quickly they build out their inventories and how fast they add new stores again remains to be seen. Those retailers with stronger balance sheets will be better positioned to take advantage of the market and real estate opportunities resulting from abandoned locations of failed competitors. Alternatively, they may also look at other ways to deploy capital via Internet and digital strategies, as well as product extensions.
Other retailers are facing fundamental changes in their segments that will require market intelligence and capital. The book selling business has the challenge of digital book delivery. Some industries are reliant on consumer credit, and the availability of consumer credit is still constrained as the credit card issuers have tightened up. However, recent reports indicate that consumer credit card borrowing has declined and savings rates have peaked over the past few months, a function of consumers tightening their belts during the recession. These statistics suggest that consumers may be poised to start buying biggerticket retail items again as long as the economy does not go into another dip.
Many people expected to see bankruptcies in January and February, which are when retail companies typically file, as their inventories are low and their debts lower. Surprisingly, despite there being many companies that need to fix their businesses, we haven’t seen any large retail bankruptcies. The conservative approach to inventories and spending enabled many players to conserve cash, and, in fact, generate some additional cash, which helped them to see another day. After significant cost cutting, there is not much more to cut, so the top line needs to come back for some of these marginally surviving companies.
Also, capital has started to free up. In 2008 and most of 2009, there was virtually no “rescue capital” available. Investing in a retailer in 2008 and early 2009 was like catching a falling knife, given the inability to gauge when negative sales trends would stop. Today there is more activity in terms of investors willing to help some ailing companies that need junior capital to turn their businesses around.
Burt Feinberg is managing director and industry group head for the Retail Finance group within CIT Commercial & Industrial, a leading provider of asset-based revolving credit facilities and cash-flow term financing to U.S. retailers.