Looking for Silver Linings, Finding Reasons to Be Cautious
Contrary to what you might think, now is not a fun time to be a retail-industry reporter, at least not if you care about the industry and the companies and people who populate it. Witnessing the challenges faced by individual companies is akin to watching a friend suffer through an illness, never being sure if it will be terminal or just gut-wrenching.
Consider Mervyns. One of the first companies I reported on back in 1978 when its founder, Mervin Morriss, sold out to Dayton Hudson Corp. (now Target Corp.), Mervyns today is a shell of its former self. It has had many difficulties, but the coup de grace might well have been delivered by the financial suits who bought the company in 2004. To help defray the $1.2 billion cost of acquisition, they leveraged Mervyns’ below-market rent locations, separated them from the chain’s operations and then leased the sites back to Mervyns at higher rents. Mervyns filed for bankruptcy last summer, and then sued its former owners in September, alleging the real estate transaction contributed to its Chapter 11 filing. (Forever 21 is seeking to buy its remaining 150 stores.)
Many retailers were scooped up by private investment firms over the last 10 years in the belief they could wring out excessive expenses, exploit assets and then flip them to a new owner or launch them as a public company to turn a profit on their investment. I fear that under today’s economy many of these retail companies are vulnerable to the same fate as Mervyns.
As I ponder the global fallout of the credit market crunch, I wonder if we will ever see strong national leadership that at the very least will offer comfort and the appearance of economic wisdom. Sadly, the presidential choices before us this month did not inspire a strong conviction that either candidate possessed a vision for the future. Nor did I observe any more clarity coming from our soon to be ex-president, who thankfully did not suggest that this crisis could be cornered by shopping more, as he advocated after the terrorist attacks of Sept. 11 and in late 2006 as talk of a recession grew louder.
Here in New York City, where seemingly every available storefront in the last five years saw its rent escalate as a precursor to becoming another bank branch, the fallout from the rash of bank mergers may well signal a return to rational leasing. But I wonder about stores along trendy Madison Avenue or in SoHo that are paying top dollar per square foot. Many of their clientele, flush just a few months ago, have had large portions of their assets flushed away. With European and Asian tourism also affected, will high-end stores be able to survive a Christmas that analysts predict will be on the lower end of expectations even for the wealthy? The Nielsen Co. reported 32% of households earning more than $100,000 a year expect to spend less this holiday season; just 5% expect to spend more, vs. a year ago. Saks Fifth Avenue, Neiman Marcus and Bergdorf Goodman have lost the aspirational shopper. So has Abercrombie & Fitch.
I dread Black Friday. Having gone on record (Chain Store Age, mid-December 2006) as believing the frenzy of early-morning specials demeans shoppers and workers and puts them at physical risk, I fear that this year’s economic condition will supercharge Black Friday madness. Any store that does not safeguard shoppers and staff with adequate security will be negligent, morally if not criminally.