Many consumer companies were struggling before the arrival of COVID-19. The pandemic threatens to put them under for good, unleashing a wave of retail bankruptcies and store closings unseen in many years. As of mid-September, at least 27 major retailers had filed for Chapter 11 bankruptcy protection in 2020, compared to 17 in all of last year, according to Retail Dive. The pandemic has accelerated the shift away from shopping in person, making it difficult for many brick-and-mortar retailers to sell products, service their debt load and pay vendors.
Amid all these factors, a lot of distressed consumer companies now find themselves at a crossroads, with a difficult decision at hand: wind down, declare bankruptcy, sell the business or try to adapt to the times and retool their entire operation.
If your business is weathering coronavirus-related distress, before you decide what to do next, you must know exactly what your options are. Here are seven viable steps to consider building into your game plan for continuing to survive the crisis and thrive on the other side.
#1: Seek an out-of-court solution
While filing for bankruptcy is a legitimate option, it’s not the only one for struggling consumer companies. In our work with consumer clients, we’ve recently seen some positive outcomes via out-of-court negotiations. With the pandemic affecting everyone, there has been more transparency and open-mindedness among the various constituents in the process. Just make sure you go into the negotiation prepared: Identify your problems, and be ready to offer your proposed plan for a solution.
As one example, we’ve seen success lately with clients negotiating changes on their lease obligations. In one recent case where a retail client worked with their landlord out of court to resolve a dispute, the retailer agreed to pay the landlord’s real estate taxes, CAM charges and similar expenses rather than rent. Another option to renegotiate lease terms could be a promise of supplemental payments once lockdown restrictions are lifted and consumers feel safe to shop in person.
#2: Extend your cash runway
Some industries are predicting lengthy rebound times, like air travel saying they don’t see a return to pre-COVID-19 activity until 2024. If your business has a significant focus on travel, what can you do to stretch your cash runway?
Cash management in any situation, pandemic or not, is extremely important. That means examining every dollar that goes out the door. Step back and take a close look at how you’re running your business. Are there creative ways you can manage your operating margins and extend your cash runway?
It might mean reaching out to vendors and suppliers to renegotiate payment terms. For instance, instead of receiving a full payment amount, vendors might agree to accept a percentage of sales or percentage of gross margin. That’s the kind of arrangement that can help consumer companies extend their cash runway well into the future.
#3: Focus on supply chain support
Customer engagement and demand are critical, but without supply chain support, they won’t materialize into revenue. One of our clients recently ran into trouble with its supply chain in Mexico because of COVID-19 disruptions. The client had pivoted to an online sales platform and was seeing a spike in demand for its products, but was not able to fulfill the orders because its supply chain was disrupted.
The lesson here is that proactively addressing vulnerabilities and creating better transparency can help build a more resilient supply chain and ultimately lead to greater sales.
#4: Appeal to potential buyers
Yes, there are buyers in the market for struggling consumer companies, including private equity firms, strategic investors and large mall operators. Simon Property Group and Authentic Brands (through their joint venture Sparc, LLC) recently inked a deal to acquire major retailer Brooks Brothers, according to news reports, and JCPenney just avoided liquidation by agreeing to an acquisition by Simon and another national mall operator, Brookfield Property Partners.
Private equity firms, for their part, are actively shopping for distressed opportunities. For example, according to reports, KKR recently announced it had raised $4 billion to focus on distressed investments; Ares Management Corp. just closed a $3.5 billion private equity fund focused on “stressed/distressed” investments; and Oaktree Capital is dedicating $15 billion to its latest distressed fund, according to reports.
Deals will be made by opportunistic acquirers that see value in name brands that retain potential and may ultimately be revitalized. Of course, retail brands that can control expenses and move toward digital platforms will be the most attractive targets.
#5: Don’t be afraid to declare bankruptcy
The fact is that in today’s COVID-19-impacted environment, restructuring and bankruptcy are no longer dirty words, and outright refusing to consider these options can be a fatal mistake in your quest to survive the pandemic and reimagine your business once we reach the other side.
In some cases, bankruptcy can be a definitive solution that allows a company to be sold free and clear, without liens or other encumbrances, which can drive up the value. Bankruptcy also provides a forum to auction real estate and other assets, again potentially leading to a higher value.
#6: Embrace digital transformation
Even six months into the pandemic, it’s not too late for strong brands to embrace digital transformation. Doing it well means being agile and setting up the necessary systems to make the transformation as seamless as possible.
There are new ways of succeeding in retail, and companies that adapt their business model to the new digital landscape can still find ways to survive and thrive. But it won’t work for everyone. Consumer companies and brands with minimal online experience, or with one that pales in comparison to the in-store experience, will continue to see a drastic reduction in sales.
#7: Think outside the box
We have one retail client that was struggling even before COVID-19 hit. When the pandemic arrived, it instantly became clear that they would have to get creative if they wanted to survive.
Management reached out to a large ecommerce distributor and was able to negotiate a deal with the ecommerce giant to sublease part of its retail space and convert it into a launch center. The revenue from the deal provided the funds the company needed to service its debt and avoid what otherwise looked like a potential bankruptcy filing.
Struggling consumer companies should take solace in the knowledge that there are plenty of options available that will enable them to emerge from this crisis still standing — and perhaps stronger than ever. The better prepared you are with a game plan, the better chance you’ll have to overcome the pandemic and set yourself up for a prosperous future.
Stephen M. Wyss is a partner at CohnReznick and serves as the Firm’s Consumer Industry Leader. Wyss provides audit and accounting services to clients in a variety of industries including retail and consumer products, apparel and fashion, media and entertainment, manufacturing, and life sciences. Chris Creger is a Principal in CohnReznick’s Restructuring & Dispute Resolution Practice, where he provides financial advisory, business restructuring and transaction support services to corporations, debtors, bondholders, hedge funds, law firms, lending institutions, private equity firms, secured lenders, unsecured creditors and other constituents.