Retail Customer Programs in Bankruptcy

This blog will focus on the importance of bankrupt retailers continuing customer programs during bankruptcy proceedings to avoid irreparably harming the go-forward retail business.  These programs are especially important in maximizing the value of the estate in reorganization and sale cases, but can also be helpful in an orderly liquidation.

Retail Customer Programs:

Retail customer programs are a way for retailers to encourage the continued support of customers.  They allow retailers to gather data on customer behavior in order to analyze trends and reward or influence shopping behavior.  Programs generally include the ability to redeem gift cards and merchandise certificates, policies that allow for returns, refunds and exchanges, incentives to reward loyal customers as well as credit memos, prepayments, rebates and coupons.

Reorganization/Sale Scenario:

The continuance of retail customer programs in bankruptcy helps to preserve the bankruptcy estate during the reorganization process by maintaining valuable relationships with customers, which frequently take many years to build. The loyalty and continued patronage of the bankrupt retailer’s customers is critical to its financial survival and ability to successfully reorganize as a going concern. For example, if the bankrupt retailer does not honor gift cards or existing exchange policies, then those customers will likely feel “cheated” and may shop elsewhere.

Under a sale scenario, the discontinuance of customer programs could negatively impact the purchase price as prospective buyers may reduce the purchase price to compensate. Certain customer programs have value and can be sold, but need to be maintained so that the buyer believes it can gain a new customer. For example, Brookstone capitalized on this by honoring Sharper Image gift cards to gain new customers after Sharper Image filed for bankruptcy.

Orderly Liquidation Scenario:

The ability of the bankrupt retailer to maximize the value of its assets and implement an orderly liquidation requires a delicate balance between maintaining the loyalty of its customers while maximizing the value of its inventory. If the bankrupt retailer is unable to do so, customers may not visit stores during the crucial initial phase of the store closing sales, thereby negatively impacting the recoveries on the liquidation sales.

Bankruptcy courts recognize the importance of continuing customer programs and usually approve motions seeking authority to do so.

Have you seen any recent examples of bankrupt retailers choosing not to honor customer programs during the bankruptcy?