The Retail Bankruptcy Bellwether

In the 1990’s, everyone talked about the Walmart effect on retail — the idea that the big box store was making every other kind of retail method obsolete. It was a well from which thousands of think pieces drew life.

In the age of Amazon, people tend to forget about the terror that the Walmart effect instilled, notes Isaac Marcushamer, chief innovation partner and partner in the Business Reorganization practice group at Berger Singerman law firm. An interesting phenomenon, he notes, since “in a lot of ways what we are seeing now with Amazon is just the new version of the Walmart effect.”

Thanks, in part, he said, to Steve Jobs “putting a super-computer into all of our pockets ten years ago.”

But, as Neanderthals could attest to (had they not be disrupted out of existence by Homo Sapiens), evolution has costs — and not everything survives.

“You see an industry get disrupted, you can predict in some amount of months or years there is going to be fertile field to plow for people in my line of work. If I were a mid-sized retailer that was one more of the pack without an outstanding feature, I would be a little bit worried. Because consumers are going to look at your offering and decide to buy your equivalent from Amazon,” Marcushamer noted.

That said, he also noted that tales of the retail apocalypse tend to get a bit overhyped. It took a decade for Amazon to push Borders out of business — and Barnes and Noble continues to cling to life. Circuit City also was a multi-year come apart that concluded in bankruptcy. Taxis, he noted, are decisively having their clocks cleaned by Uber — and yet only some have gone under.

Among the areas that happen to draw an inordinate amount of fear and hysteria are malls and strip malls.

Anchor stores, Karen Webster noted, whether they be Sears, Macy’s or, more recently, Wegmans, are the model physical retail builds on, and as all those stores are taking a beating from Amazon — so goes that once tried-and-true business model and all the little stores hoping to draft in the wake of that anchor.

But Isaac Marcushamer was a bit more chipper, saying reports of the malls’ impending death are perhaps a bit overstated.

“When someone says malls are dead, they are picturing the big malls going under,” he said. What is really going under is a division between destinations malls — malls that have amenities that draw people to them whether or not they are shopping — and the around-the-corner strip center with an anchor tenant. Those malls are facing headwinds that they may or may not be prepared to face.”

And that, he notes, is going to depend on how specific anchor tenants that are coming into direct competition with Amazon choose to compete.

“Walmart just spent billions on Jet.com. They are not going to sit back and say to Amazon, ‘Well, okay, take our business.’ I also expect to see moves out of Costco and Target as well.”

What’s Next

Marcushamer noted that when changes become solid — and bankruptcies start rolling in — it won’t look like dominoes falling.

“I think this is going to look like 52-card pickup, when everything is on the floor, and then it is a lot of very massive restructuring or staying on the floor.”

One of the telltales to look for: lenders tightening the purse strings.

“I think you will see lenders who are lending against commercial real estate anchored by one of these chains doing deeper and more in-depth analysis on the trends,” he observed.

He noted that as refinances start coming up on those loans, the segment will likely start seeing its earlier and most surprising change.

“The lender will say, ‘Wait, you have a little shopping center, and Albertsons is your anchor tenant and the store you are relying on to drive business so you can pay this loan. So, what’s the plan if Albertsons shuts stores?’”

That, he noted, is where the rubber could really start hitting the road — as shopping mall owners without a sufficiently good answer to that question are likely to find themselves hit with borrowing much more money to make up for the new risk — or possibly face a big and unexpected balloon in payments if lenders decide the refinance is not in their interests.

“I think people who are looking for a big massive chain failure are looking in the wrong place. I think the first place the pressure is going to come from is really going to be those lenders and those properties.”

It is easy to panic, Marcushamer noted, but the reality is that even Amazon needs time — they haven’t even finished acquiring the grocery chain Whole Foods yet. They can’t make any big changes for a while.

But, he noted, the challenge for those left in grocery and retail now is getting out ahead and finding ways to break out of the middle of the pack. Because the change is coming — and those who don’t have plan?

Well, Borders didn’t have a plan because they thought buying books online was a fad.

Buying books online lasted — and turned into buying everything online. Borders did not.

And that happened before Mr. Jobs invented the iPhone. What’s up for debate is whether 10 years is the typical timeframe for a retail apocalypse to take hold, or whether that timeframe will compress, given mobile’s acceleration. Uber, for example, was started in 2009, and six years in made an appreciable dent in the value of the taxi business.

The question for retail — and everyone else impacted by it — is when you start the countdown clock.