Features, Finance & Economics, Trends

Are We Into Creative Destruction or Just Plain Destruction?

According to Moody’s Investors Service, 13.5 percent of their retail and apparel portfolio is distressed, compared to 16 percent during the Great Recession. This little factoid, along with the recent announcements of thousands of store closings across the industry, bankruptcy filings and outright liquidations, ought to send shivers up our collective spines.  It sure does mine.  The same report stated that debt maturities are also headed toward record levels over the next five years, which will likely lead to more store closings and bankruptcies.

Furthermore, regardless of all the positive economic news we read and hear about, price deflation across the general retail sector continues amidst the “race to the bottom” insane price promoting and discounting.  According to Fung Global Retail and Technology newsletter,   deflation was in the range of 1.5 percent to 2.0 percent.

So price deflation alone is bad enough for the bottom line.  Now that pressure is being exacerbated by investments in e-commerce, which have to be made by legacy retailers just to succeed going forward.  Antony Karabus, chief executive officer of HRC Retail Advisory, said in a WWD article that a recent analysis “showed that the investments made in e-commerce and its variable cost nature (versus fixed-cost structures of operating physical stores) is eating away about 25 percent of pre-tax earnings.” That isn’t sustainable, he noted, and “retailers will be forced to refurbish stores, close some and put greater emphasis on the in-store experience since 90 percent of sales still occur in a physical store.”

Even so, check out the following chart. The industry is going into its third year of month over month of declining store traffic. Sales per shopper shows that consumers were originally more purposeful in their shopping, having researched online.  However, we can see that now that metric is flattening.

The Moody’s report went on to list retailers at risk due to factors like stressed liquidity, weak quantitative credit profiles, challenged competitive positions, private equity ownership and erratic management structure. It included Claire’s, rue21, Sears, J.Crew, Payless, Nine West, Gymboree, NYDJ Apparel, True Religion, Indra, Bon Ton department stores, David’s Bridal, TOMS Shoes, Tops, Velocity, Fairway, 99 Cents Only Stores, Charming Charlie and Evergreen Saver.

Could all of these metrics actually be sending a positive message, and we are witnessing the manifestation of famed economist, Joseph Schumpeter’s popularization of Karl Marx’s theory of “creative destruction?” According to Schumpeter, the “gale of creative destruction” describes the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”.

So is the old world model of retailing being destroyed by (and making room for the creation of) a new world entrepreneurial models?  If so, isn’t this a positive outcome?

Yes and No

The answer is no for those retailers and brands who did not, and are not able to understand and adapt (quickly) to the new world consumer who is armed with technology and who has devalued the value of material goods and revalued the value of experiences. The retailers cited in Moody’s report as “at risk” are definitely being destroyed. While some may have seen the necessity to change, they may have been restrained by financial issues and constraints — or just poor execution.  Others just didn’t have a clue. Regardless, my bet is that most of them will be victims of creative destruction.

And those retailers owned by private equity firms whose interests are more about making a fast buck than transforming into revolutionary new models will surely fail. As Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates, told Retail Dive earlier this year, “Now private equity is there with billions in debt — and goodbye.” The first thing they do is borrow billions, and retailers can’t function that way because the business is too volatile and it’s too unpredictable. These poor apparel chains end up one way or another in the hands of private equity — and in the end, there’s no company, no stores, no employees, and the private equity made money. Congratulations. That’s how it works.”

On the other hand, for those who have been understanding and transforming their models to be relevant and compelling to the new world consumer, creative destruction will be a positive outcome. It is really more like creative “disruption.” It’s the old world embracing entrepreneurial and innovative new models, including Amazon and all of the Amazon wannabes. Look at it as more disruptors vs. destroyers. It is the old world models using disruption to their advantage. The strategy is to recreate and replace.

As has I have said before, and many times over, retailers and brands are strongly advised to disrupt themselves before they are disrupted and destroyed from the outside in. And urgency is the operative word.

Adapt to, adopt or acquire the new world order. Take Schumpeter’s twist on Marx’s theory seriously so you won’t be on Moody’s next list.

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