Life after a bankruptcy

Nearly 30 retailers have filed for protection since the onset of COVID-19. What recovery strategies could help them survive?

Reitmans

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This article is the first in a series on surviving bankruptcy protection during COVID-19. Check back next week for part two on the role of private equity in retail recoveries during the health crisis. 

For retailers, the real test may still lie ahead.

Seven months into the pandemic and the future has never seemed more uncertain: a growing tally of coronavirus cases could once again shutter stores, further limit in-store capacity or send holiday shoppers to ecommerce channels in unmanageable numbers.

Many retailers have already been pushed to the brink.

Since mid-March, close to 30 Canadian retailers have filed for some form of bankruptcy protection, according to a list compiled by Insolvency Insider, including MEC, Aldo, Sail, Mendocino and Davids Tea. This year, in apparel retail alone, 11 Canadian-based companies have filed for protection – Reitmans, Frank & Oak and Laura’s Shoppe, to name a few – and eight U.S.-based retailers have done so in Canada, according to Trendex North America, a consultancy specializing in the Canadian and Mexican apparel markets.

That doesn’t necessarily herald the collapse of the entire retail sector. For certain companies, entering protection may be the opportunity they need to reset and begin to build anew. And there may even be advantages to taking this undesirable step in the midst of a pandemic, according to experts who spoke to strategy. Success will not come easy, and strategies will vary. But, the experts say, there are general principles all troubled retailers should bear in mind as they reset for the brave new COVID-19 world.

Frank&Oak

Do consumers care about retailers’ financial woes?

The virus that causes COVID-19 successfully sought out pre-existing vulnerabilities in humans. And in many ways, that’s exactly what it did to the retail sector, says Doug Stephens, retail expert and founder of the Retail Prophet. Entering the crisis with any one of four pre-existing conditions was “punishing” for retailers.

The warning signs (according to Stephens): carrying an enormous amount of private equity debt; failing to transition into the digital era and remaining too reliant on physical stores for distribution; being part of a sector that was “already under siege and really losing traction with consumers,” such as department stores; and losing – and failing to rekindle – enough brand equity with customers to stay afloat through a period of crisis.

“There’s a spectrum along which some of those problems are easier to solve than others,” Stephens says. For debt-laden companies whose problems are largely financial, protection offers a relatively easy way to restructure and move forward – without the same financial burdens as before. But bankruptcy won’t solve the last three problems. “It’s not a panacea. And it doesn’t necessarily give you a get out of jail free card.”

There’s also consumer perception to worry about.

Under normal circumstances, the word “bankruptcy” carries damaging connotations for businesses. To mitigate the damage, Stephens says brands must typically undertake enormous PR efforts and be “very transparent about what is transpiring” behind the scenes.

However, with COVID-19 in full force, other experts note that those that have only recently come under hard times may not face the same reputational harms.

“People know that retail and other industries have been disrupted and have struggled, and the pandemic has famously made things worse for many businesses,” says Kim Koster, a brand strategist at Koster Strategy. “These challenges are not the black mark they may once have been.”

Randy Harris, president of Trendex North America and publisher of Canadian Apparel Insights, adds that bankruptcy filings in the apparel world typically see retailers very publicly shed their assets and stores over a prolonged period of time. This was the case, for example, with Sears Canada.

But bankruptcies taking place during the pandemic have likely been less visible, he says. The storm hit overnight, and in some cases, consumers may not even be aware that a particular company is in financial trouble. “The traditional questions that deal with bankruptcy and how you’re going to relaunch your company aren’t necessarily applicable to this situation, because the situation is so unique.” Even in cases where consumers are aware, he says, there may be very little stigma attached to it.

J Crew

Strategies for kickstarting the recovery process

As with any strong marketing strategy, Harris says retailers working on post-protection recovery plans should start by speaking with their customers. “You can’t build a strategy until you know to what degree your customers are aware of your financial problem, in this case, bankruptcy and how they perceive it.”

First and foremost, retailers should start by having their customer service departments conduct surveys by phone. “You need advice; you need information; you need input to build a strategy,” he says, adding that not many companies have taken this step. “It costs basically nothing, because you have your customer service department do it. That’s number one.”

Step two, according to Harris, is building a communications strategy around the findings of step one. More specifically, retailers should focus on communicating with their most frequent customers – not those who occasionally wander in while crossing the mall – and entice them back into their physical stores with, for example, the offer of a gift card redeemable only in person.

In the meantime, companies lagging on ecommerce should prioritize bolstering those operations, he says. Until they’re out of the weeds, that could be as simple as eliminating certain shipping costs or minimum-purchase requirements.

In most cases, Koster believes that as long as consumers continue to get the same products or services and brand experience, there’s “no need to keep reminding [customers] that there’s been a struggle behind the scenes, or a change in ownership.”

After filing for Chapter 11 in May, for example, Koster says fashion retailer J. Crew’s communication quickly evolved from “We continue to be here for you” social posts to more standard “New arrivals for easy summer days” messaging – without missing a beat. (The company exited bankruptcy protection in September and says it is “well positioned for long-term growth.”)

Stephens adds that while investing in marketing or brand building during a bankruptcy proceeding is possible – provided the company can continue to meet its debt obligations – doing so falls in the realm of “triple bypass surgery.”

“Can triple bypass surgery save your life? Absolutely… But any doctor is going to say to a triple bypass patient, ‘All right, so you’ve got to correct some of the lifestyle issues that brought you to the operating room today. You can’t continue to eat the same way; you’ve got to start exercising; you need a plan for your health going forward.’”

And that’s why it’s so important for companies to construct a cogent plan for the future, he says, one that tells customers, investors and employees why they believe they remain relevant and can be successful again, and “here’s a very deliberate and designed plan to get us to that place.”