How Retailer’s Can Avoid Liquidation

The ideal retail business model is to stock stores with desirable products while maintaining appropriate seasonal and overall inventory levels in order to sell goods at optimal prices to achieve the highest possible gross profit.

But with the current unemployment rate hovering around 10%, consumer confidence and spending levelshave remained sluggish through this year’s back-to-school season.

To offset low margins resulting from weak sales, retailers have been downsizing their operations and offering steep discounts to move inventory. However, this has proved insufficient for retailers with severe liquidity constraints and has led many to bankruptcy. In these instances, some retailers were reorganized while others were sold, but many of them were ultimately forced to liquidate.

Here are a few key strategies to avoid liquidation:

Inventory Issues:
  • Determining the proper levels and mix of inventory plays a significant role in retail success e.g. maintaining a conservative or historically proven inventory selection with less emphasis on “risky” trends.
  • Poor pricing can lead to significant discounting of goods. One strategy to maintain healthy margins and spur sales is to make all inventories available to purchase.  Another way is to improve inventory tracking systems and customer online experience. Recently, the NY Times praised Nordstrom for its virtual inventory model which allows customers access to almost any good they carry.
Lease Issues:
  • According to Bloomberg, there has been a drastic uptick in store vacancies over the past few years. Some retailers are using the weak real estate market to their advantage by renegotiating leases with landlords enabling them to potentially turn unprofitable stores into productive stores.
  • Unfortunately, some retailers are unable to renegotiate lease terms with landlords outside of bankruptcy and file Chapter 11 to take advantage of the favorable lease rejection provisions.
Payroll Issues:
  • Payroll is a difficult issue since all retailers need people to staff stores. Retailers are trying to keep payroll costs down by increasing the use of part-time employees. By reducing full-time employees, retailers can keep a lid on overtime, employee benefit, and wage costs.
Overhead Issues:
  • As retailers close stores, they must ensure that overhead expenses remain aligned. By monitoring and unloading slow moving or obsolete inventories, remaining inventories can be redistributed to fewer warehouses, allowing the consolidation of warehouse space.
By following these strategies, retailers can increase their odds of survival in today’s economy.

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