Retailers - Vicious economic times could call for brutal retail game plans

Surviving vicious retail markets can require difficult and unpleasant action -- bankruptcy, staff reductions, renegotiating leases or shuttering underperforming stores. Although the navigation of today's challenging marketplace can be brutal, those steps are often necessary.

That was the consensus of a group of business attorneys, retail real estate experts and specialty retailer financial officers who gathered recently for a conference in Seattle. The goal: offer tips and suggestions for distressed retailers to help them get a handle on the extreme downturn in the economy.

"Retailers are facing unprecedented challenges," said Scott Staff, business development director at event sponsor Perkins Coie, Washington state's largest law firm and legal counsel to leading retailers and others in consumer products. "We expect the challenges to grow in number and complexity."

Practical advice for surviving the downturn ranged from knowing when a customer is in trouble (sources include www.debtwire.com, a real-time news and data site for financial professionals published by the Financial Times, plus www.MarketWatch.com) to what to look for when a customer is in trouble (e.g. are they stretching out payments).

Other advice included:

Be sure to have a diverse base - Don't become dependant on any one single customer or account, said Marv Toland, Eddie Bauer's chief financial officer. Prior to Eddie Bauer, Toland was executive vice president and CFO of London Fog Group from 1999 to 2007. Seattle-based London Fog Group sought Chapter 11 bankruptcy protection twice (prompting some ribbing from panelists about the company having filed Chapter 22). Click here to see a March 23, 2006, SNEWS® story, "London Fog files again for Ch. 11 reorganization, to divest Pacific Trail.")

"You can't prevent these shocks (customers going out of business), so make sure that no single one can kill you. You have to diversify," Toland said.

Later, when asked what a business owner can do when suppliers or customers are operating under Chapter 11 reorganization and court protection, Toland suggested a clinically objective approach.

"Ask why they are in bankruptcy," he said. "If you see a business model that really is failing and the ground is shifting so fast, it may not be fixable in today's environment."

Use bankruptcy if it could provide breathing room - One tool a bankruptcy filing can provide is the ability to unload unprofitable leases with limited exposure to landlords, Smith said.

It's no secret that retailers are struggling. Retailers are seeing their revenue plunge as financially strapped U.S. consumers spend less and scrutinize purchase decisions. The holiday shopping season failed to save some companies as seasonal sales fell, with some areas logging the first declines in 20 years.

Last year saw a growing number of companies seeking bankruptcy protection, shuttering thousands of stores, breaking leases with shopping malls and laying off workers. And retailers are far from alone in rising bankruptcy rates: newspapers, auto makers, casinos, electronics retailers, and fitness clubs, manufacturers and retailers. The latest: Ritz Camera Centers sought Chapter 11 protection in early March as did Joe's Sports & Outdoor (Click here to see that March 5, 2009, SNEWS story, "Joe's Sports & Outdoor files for bankruptcy protection.")

…But it's not for everyone - A bankruptcy is not "a solution to a business problem, it's a solution to a balance sheet problem," said Alan Smith, Perkins Coie partner, during a retail restructuring and bankruptcies seminar. Bankruptcy offers "just an opportunity for the debtor to take a deep breath."

"There's no point in filing bankruptcy if you don't have a core business that is worth saving," Smith said. "You have to look at business and ask if it is a business that can survive in today's environment."

Carefully examine workforce reductions - During such a down economy, knowing when and how to reduce your workforce is, of course, another important key to survival. To catch the benefits of the next boom, a company also needs to manage its workforce with an eye on top talent retention, employee morale and strategic hiring.

"Some clients are looking for bargains, but that doesn't always work out," said Roy Notowitz, partner at Portland-based Generator Group, a recruiting firm. In a down economy, there are "more candidates on the market, but usually the market floods from the bottom up. "

In these times, it's difficult to convince professionals to relocate for jobs, Notowitz added. Trailing spouses often fear they won't find new employment after following a partner to a new location, he said. Decreased residential real estate values also hamper relocation deals.

Avoid layoff mistakes - The other side of the headcount equation -- reductions in workforce -- sees more action. More companies are scrambling to trim their worker roles. Perkins Coie attorney Linda Walton advises employers to avoid layoff missteps that could land them in front of a jury.

"For every single person you layoff, you need a reason for laying off that person," she said.

Develop selection criteria; train your managers on the process; and sit down and map it out in advance, she said.

As bad as 2008 was, 2009 isn't looking much better. In fact, you can already say sayonara to New Year's cheer, said Nina Kampler, executive vice president of Northbrook, Ill.-based Hilco Real Estate. She spearheads retail business development and works with major retailers and commercial companies to implement real estate portfolio restructuring strategies.

"People still had jobs in 2008. (In 2009), actual net worth has disappeared and there are way fewer shoppers," Kampler said.

Phase out underperforming store locations - In order to stay healthy, retailers can't allow underperforming, duplicative or non-core locations to weigh them down, she said. Retailers have to grab their landlord's ear -- and renegotiate lease terms, she said.

Kampler said she sees "a mass movement of probably every retailer in this country with more than one store acknowledging that in order to stay alive the expense line of rent and occupancy -- the R&O -- has to shorten."

"What we are really talking about when you strip this all away is a retail revolution," she said. "It's about valuations, about what was that shopping center worth? How many times did it change hands? All that perceived value has been filtered down to a rent number and the tenants -- the retailers -- were happy to pay as long as the people were ringing up hundreds of thousands in sales each week. All that is the backdrop to first quarter 09. Where it will settle, we don't know. But people are shopping differently and today's values are all wrong."

Every retailer should carefully study the value of their real estate, Kampler said.

Given the downturn, some landlords (particularly smaller ones) are nervous and are willing to deal, willing to work with retailers to try and keep them.

"They not only want a warm body in the real estate, they have a personal pride and interest in the operation," she said. "They are proud of (the businesses) they have in the center and they want to keep them there."

To get the landlord's attention, you could show the level of threat and demonstrate the downward trend in sales, she said. Of course, Chapter 11 provides another tool that gets the landlord's ear. But she thinks many landlords would rather renegotiate first, and she encouraged that route whenever possible. Forge win-win solutions with landlords, she added.