Thank goodness someone is pointing out that the reason that large retail chains are having a horrible year isn’t just because of the rise of online buying. From CNBC:
With more than half of 2017 still ahead, the retail industry is seeing a record-setting pace for bankruptcy filings and store closings — and more are expected in the not too distant future, despite what most consider a healthy consumer.
This tipping point for retail is the result of a number of compounding reasons, but the inability to pay looming, massive debt bills is dealing the final death blow to many.
Yes, more shopping is shifting online in general, and to Amazon specifically, as in-store shopping traffic and sales trends fall for many retailers and shopping centers. Slice Intelligence said 43 cents of every online dollar is spent on Amazon, based on its analysis of millions of email receipts.
However, according to the latest Commerce Department retail sales data, 86 percent of all retail sales (excluding motor vehicles and parts and food service and drinking locations) are still made in physical, brick-and-mortar locations. To be sure, the online versus in-store sales breakdown varies wildly from retailer to retailer.
I think the more important answer is that massive retail chains, cobbled together through leveraged buyouts and financed by debt, just don’t serve people very well. And, importantly, depend on certain basic assumptions which aren’t panning out, specifically that you’ll always be able to make your interest payments based on increasing sales. And that there will always be increased returns to scale.
Not likely. No one structures a deal contingent upon rising sales to service interest. However, deals structured with rising principal amortization are common, in all industries, and are part of the gig. They get refinanced 4-6 years from closing. More quantitatively (with realistic assumptions) a $100 revenue company with 5% pretax margins might be structured with $20 in senior and junior debt. $5 in margin would be used to pay $2 in interest. The principal could be extinguished in about 7 years. You can play with sensitivities from there.
Separate and apart from the Internet, there is too much retail space, too many tired or faddish retail concepts and too many financially laboring consumers. The failed LBO model really comes from failure to properly gage this, the poor execution you cite (if only employees were paid like In-N-Out Burger — Nirvana) or failed rejuvenation and real estate rationalization plays.