As if the debacle with financial services and auto sector wasn’t enough, here’s another one: Retail. With Circuit City filing for bankruptcy, one wonders who’s next by Pawan Chabra
They say that developing countries like India and China
need to maintain steady economic growth of 7-8% to lift millions out of poverty. Unfortunately, for countries like US, who are staring at prospects of economic degrowth, the challenge seems to be with respect to millions that are not in poverty yet. The challenge increasingly would be how to keep them there; as companies, one after another are sounding the alarm about not so impressive times ahead.After the crunch in financial services and auto, retail is the next source of bad news. Circuit City, the second largest consumer electronics retail chain in US has recently filed for bankruptcy under chapter 11, which has created a chaos in US retail industry.
In a situation where analysts are quite sure of a dull Christmas season ahead for retailers this year, Circuit City’s bankruptcy has given signals of a very rough road ahead to the other retailers in US. As John Crossman, President Crossman & Company states, “Retailers are very desperate for a bright festive season ahead and the industry need a big holiday season. We will see some big winners and big losers this time.” Crossman’s prediction seems true enough as, in a letter posted on Circuit City’s website, Jim Marcum, VP & CEO, Circuit City Stores, Inc. said, “This (bankruptcy) filing will give us the time and resources to address our financial challenges.”
City’s filing for bankruptcy has given many sleepless nights to giants in the IT industry as almost all IT stocks fell down drastically as soon as news of the filing spread. HP is the biggest unsecured creditor of Circuit City as City owes $118.8 million to HP, followed by many others who’ll now have to reframe their strategies to stay profitable in these bad times.
The irony in this case is that Circuit City’s closest rival Best Buy (who has also eaten Circuit City’s share of earnings) recently registered $2.15 billion in operating income, maintaining a surplus due to which many market experts are considering that City’s quagmire is a case of internal mismanagement. But then there is an another set of market experts who still expect many more retailers to stand in the chapter 11 list in times to come. Doron Levy, President, Captus Business Consulting, who belongs to the latter category, asserts, “We will see some more bankruptcies in the near future, but I really see consolidation on the horizon for many chains. Some have really strong business models, but are not managed correctly. I do have some specific retailers that I could foresee going into bankruptcy and eventually disappearing form the retail landscape all together.” Talking on the same lines, David .J. Livingston, retail consultant, DJL Research points out, “I think we will see an onslaught of closings among the small specialty stores located in shopping malls. This will result in the downfall of several real estate investment trusts which own these malls.” Though unfortunate, but retail is always affected in some or the other way from the roadblocks in the growth of any industry for that matter. So, the position of the retailers in the economic chain today is simply determined by what they sell. The slowdown in spending, though, would have an impact virtually across the horizon.
It’s not only retail outlets who are tightening their belts; online retailers are also joining the bandwagon as they are cutting their marketing and promotional budgets to stay profitable. Adding to that, online retailers are using tactics like free shipping to attract more buyers. And the decision seems wise enough. As per a study by Hitwise, the click-rate of online retailers is going down drastically. But then, market experts are still very much in favour of growth in online retail in the coming times. The annual holiday survey by Deloitte, clearly showed that Online spending is the 2nd best shopping destination for consumers after discount departmental stores. And the sheer power of online retailing gets more clear if we go by growth figures as National Retail Federation has announced a 2.2% projected growth in overall retail sales, which stands too low in comparison to the 12% projected growth in the online sphere. So, we can be sure of one thing – online retail will grow in times to come due to the simple reason that the fundamentals are quite compelling at the moment.
But you can’t be that sure of the growth in the overall retail sector as the prevailing turmoil may not end in the short-run. The only point favouring the growth of US retail industry is that there are many big retailers like WalMart, Tesco et al who are still in an expansion mode. Livingston emphasises, “Even though the economy has been difficult, there are still many retailers expanding. Wal-Mart continues to build stores with varied formats. Target is building, Tesco is building. Perhaps not at a fast pace, but they are.” But we can expect many more not-so-huge retailers going out of business in times to come. This will surely be one Christmas that they won’t forget in a hurry.
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