Why do Retail Restructurings Fail?

The retail sector has been under significant financial distress in the recent past. An alarmingly large number of retail companies are facing bankruptcy proceedings in courts across the world. However, it needs to be understood that bankruptcy proceedings and liquidations are not a preferred solution for creditors either.

Before creditors initiate bankruptcy, they generally try to work with the retail organization which is undergoing financing distress. This is done using financial restructurings. However, the retail sector has not had a pleasant experience with retail restructurings over the years.

A large number of retail restructurings have failed over the years leaving the creditors as well as the retailer in greater financial disarray.

In this article, we will have a closer look at some of the main reasons which lead to failure of retail restructuring efforts across the world.

1. Absence of Strategic Outlook: The biggest reason behind the failure of retail restructuring is the fact that most organizations undergoing restructuring have a narrow outlook. Their vision about how their organization will look like in the future is incomplete or short sighted. The focus is on fixing the issues which are happening in the short term rather than fixing the long-term problems being faced by the company.

   Hence, such retailers tend to draw up a list of stores which are not generating enough revenues or profits. Their restructuring actions are all related to emergency measures such as closing down stores and laying off employees. The end result is a disjointed, uncoordinated and ad-hoc organizational structure which may not be best suited to meet the challenges posed by the macro environment.

   For restructuring to be successful, retail organizations need to adopt a strategic outlook. This means that they need to have a clearer picture regarding how their business operations will look like in the future. They need to imagine the exact mix of stores that they want to have and how it complements their online strategy. They also need to ensure that they get rid of old and unwanted inventory during the restructuring process itself.

   The post restructuring organization needs to run according to a clearly defined and well thought through strategic vision. The restructuring exercise does not have to be purely financial in nature. The causes as well as the effects are financial. However, the corrective actions need to be deep rooted and strategic in nature.

2. Real Estate Burden: The retail industry has undergone a massive shift from brick and mortar-based business model to an online business model. It is for this reasons that retailers who relied on brick-and-mortar business models are facing bankruptcies.

   There are many retail companies across the world which are locked in expensive real estate leases. There are some companies that have even purchased expensive real estate on high streets across the world. At one point of time, these real estate investments were assets which were enabling the same retailers to generate large amounts of cash flow. However, now, these same assets have become liabilities.

   Many retailers are not able to dispose off these assets or get out of these lease contracts. Hence, in such cases restructuring only increases their problems. They end up borrowing more money without solving the root cause. The end result is that many of these retail companies find themselves in bigger financial trouble. In such cases, it is better for the retailer to actually file bankruptcy, liquidate their assets and liabilities and then start over new.

   With the new start, the retailers can possibly adopt a newer and better business model. Irrationally persisting with the current organizational structure only compounds financial issues and accelerates the bankruptcy process.

3. High Cost of Debt: Another problem related to retail restructuring is the fact that retailers tend to borrow money at a very high cost of debt.

   Generally, retail restructurings are risky ventures and traditional investors tend to shy away from such investments. It is for this reason that such high-risk endeavours are done by hedge funds and private equity companies. These companies are known for making risky investments but they are also known for charging exorbitant interest rates. The problem with this approach is that even though retailers are temporarily able to pay down their debt, they are still under severe duress.

   Also, since they have now borrowed money at a higher rate of interest, they are not able to invest more in growth and innovation. The end result is that the problems are not resolved from the root cause and the retailer ends up in a bigger financial disarray. The existence of significant debt which has been undertaken from private equity firms prevents the retailers from resolving issues from the root cause.

The fact of the matter is that whenever a retail business goes under restructuring, there is a high likelihood that such a business will fail.

Empirical evidence has shown that retail restructuring has a very low probability of success. This is largely because of the fact that the actions undertaken to resolve the issues are superficial. Because of pressure from different stakeholders, retailers are unable to fix the root cause issues in the restructuring process.