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Retail Bankruptcies

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"Retail Bankruptcies"

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We’re certainly going to see a lot fewer stores in the future, but I don’t think Steve Benen’s quite right to say “Think about your local mall, and then think about a quarter of the stores disappearing, as compared to a year prior.” The motive for his post was a Wall Street Journal report that “Analysts estimate that from about 10% to 26% of all retailers are in financial distress and in danger of filing for Chapter 11.”

But even if a quarter of all retail firms go bankrupt, that doesn’t mean we’ll see a 25 percent decrease in the number of retail outlets. For one thing, a firm going bankrupt isn’t the same as the firm becoming non-existent. The point of Chapter 11 is to give firms a chance to reorganize and return to viability and certainly some Chapter 11 firms will do that. And even if a firm does wind up being liquidated under Chapter 7 that doesn’t mean all of their outlets will vanish. One thing that can happen during a liquidation process is that competing firms will take over some of the choicer locations currently occupied by the liquidated firm. And last, some non-bankrupt firms may expand — a downturn is good for a minority of firms.

Then on the flipside, many of the 75-90 percent of retailers that don’t go bankrupt will be closing locations nonetheless. When consumer demand goes down, the first response is to discount the merchandise to make sure you can move it. But the second response is to start stocking less inventory and operating fewer stores. And that’ll be the case for many firms whose underlying finances may be sound. Long story short, we can’t straightforwardly project the volume of retail closures from the volume of retailer bankruptcies.

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