How Is Your Company Managing Retail Bankruptcy Risks?
Sports Authority, City Sports, Golfsmith, Sport Chalet, Eastern Mountain Sports, PacSun. There’s been no shortage of bankruptcies in the active-lifestyle retail industry of late, with some of the above completely liquidating their businesses.
That typically leaves suppliers, vendors and manufacturers doing business with the retailers holding the short end of the stick — standing in a line of unsecured creditors, maybe seeing pennies on the dollar or nothing at all in the end.
There’s plenty a brand can do to mitigate those risks earlier rather than later, David Kinzel tells us. He’s a vice president for One Source Risk Management and Funding, which provides insurance for losses and/or consulting services when trying to claw back those losses.
Considering today’s market, we thought it a good time to check in with Kinzel about what options companies have to protect themselves, plus, garner his view of the active-lifestyle industry.
David Kinzel, VP, One Source Risk Management and Funding
SGB: What’s your take on why the industry is seeing so many retail bankruptcies despite overall healthy sales?
Kinzel: Most active-lifestyle retailers that failed were showing signs of trouble and deterioration for some time. They had heavy debt and could not invest in enhancing the consumer and brand experience both in store and online. Private equity had previously thrown many of these retailers lifeline investments, creating even more debt, but interest in investing in troubled retailers waned and limited the options for already leveraged companies.
The other obvious market share loss for retailers has come from the online retail and direct-to-consumer channels. Sports & Fitness online purchases accelerated materially by 32 percent during 2015, making up around 9 percent of the market according to a comScore report. Customers are quickly adopting the preference to purchase the products online and nearly every brand is aggressively pushing their direct-to-consumer strategy.
SGB: What options do vendors have to protect their risk?
Kinzel: Despite any accounting “standard”, a sale is not a sale until your customer actually pays you. \Any company selling into this retail channel should make credit risk a priority. Whether it’s managing the risk, transferring the risk, or both, it will protect profits and pay off handsomely in the long run.
Those that invest in a highly experienced credit management staff and solid credit information will realize the benefits, as you can be pro-active in high-risk situations. Adding in risk transfer tools, such as trade credit insurance, can create an optimal strategy to support a business. In fact, trade credit insurance companies have now become a leading source of credit information as they often carry information on privately held companies.
SGB: Talk a little more about the options within risk transfers.
Kinzel: When looking to transfer the risk of a customer non-payment, trade credit insurance is one of the most common methods. It is typically the lowest cost and easiest to implement tool available and essentially protects the payment stream. The market has now changed and companies can be more selective on which retailers they use insurance for; however, insurance companies have definitely clued in to the risk here making the market more challenging.
When you are talking about very high risk customers, a credit put option from certain banks can be considered. They are a great solution, especially if you are seriously considering shutting off sales to a specific customer because of the risk.
Other solutions include non-recourse factoring or A/R purchase agreements, which are basically financing of receivables. This approach is great as cash is collected quickly, but financing costs are incurred.
SGB: When a company like yours gains the rights to the debt through a transfer, do you ever see anything back from the bankrupt companies?
Kinzel: Vendors are typically unsecured creditors in a bankruptcy filing, which means recoveries can be challenging and are never guaranteed. Trade credit insurance companies can sometimes see recoveries during the process, but legal fees are costly and the time to get recovery can sometimes take years. This is another benefit of risk transfer as it helps a vendor bypass this process as they can be paid by an insurance company briefly after a default.
SGB: What’s your outlook ahead for the next year or two in the active-lifestyle retail space?
Kinzel: I suspect the next two years will be filled with extremes. We will see some active-lifestyle retailers get it right, becoming amazing success stories and MBA case studies of the future. We will also see many others continue to go down a deteriorating path, experiencing further challenges.
Online competition and direct-to-consumer channels will continue to accelerate and dictate future strategy. A common concept we hear is that customers “buy” online but they don’t “shop” online. Successful retailers will find ways to customize the experience and make shopping more interactive with a defined brand. Retailers that continue to just rely on foot traffic of customers looking to “buy” products could be in for trouble.
Photos courtesy David Kinzel