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Published in Q&A
Steven Wybo, Senior Managing Partner at Conway MacKenzie Inc. Steven Wybo, Senior Managing Partner at Conway MacKenzie Inc. Courtesy Photo

Turnaround manager: Brick and mortar retail struggles to compete

BY Sunday, April 02, 2017 04:19pm

Steven Wybo doesn’t see much of a happy ending for the vast majority of brick-and-mortar retail stores. The senior managing partner in the Birmingham office of international turnaround and restructuring firm Conway MacKenzie Inc. says the impending demise of West Michigan-based retailers like MC Sports and Family Christian Stores is indicative of the trends impacting larger mall anchors. In particular, they bear too much fixed cost and have to contend with ever-changing consumer trends. Wybo spoke with MiBiz regarding recent closures and the very limited number of options he sees for retail.

What’s your high-level analysis of the trends impacting so many legacy retailers? 

Obviously, without the brick and mortar, the online retailers are able to charge a lower price. You have compression on the revenue side in terms of margin, but then you also have compression on volume because buyers have options. But then if you think of Porter’s Five Forces … the bargaining power of the buyers, the customers and then the bargaining power of the suppliers — if (all) of those are very strong, that’s a tough business model.

How’s that playing out with the demise of all these retailers?

It’s not like MC Sports could call Under Armour and ask for a discount on the shirts and shoes. They’d say, ‘You haven’t reached any sort of scale. You’ve only got a couple hundred stores. And I’m selling to Amazon and to huge, huge big-box retail like Wal-mart. I’m willing to give them a little discount because of the amount of product they buy, but I’m not willing to give you a discount.’ There’s no compression on the buy side, and when your margins are suppressed and you can’t get your suppliers … to reduce prices, the margins get compressed just from the top line down.

With Family Christian planning to close about two years after emerging from Chapter 11 bankruptcy, is there anything in your mind that could have saved them?

I’m not intimately familiar with what they did through the bankruptcy, but maybe they could have been more aggressive on the leases. In a bankruptcy, the bankruptcy code affords you the opportunity to either accept or reject the lease. If you reject the lease, (then) you come out on the back end without the stores that are underperforming.

MC Sports executives said they’re open to the idea of a potential buyer coming in and acquiring some of the stores, although there’s no indication that will happen. Do you see any possibility of that brand surviving as a trimmed-down chain?

I think it’s limited opportunity, frankly. When you bring a liquidator in, they’re obviously going to liquidate the inventory. If you think about strategic buyers in the sporting goods sector, I just don’t see it. I don’t see MC Sports having this sort of iconic brand, like Moosejaw. … They have a lot of commodity products; you can pretty much get them anywhere. Without that ability to charge a niche, specialty price with more margin, I just don’t see anyone paying a premium — or anything for that matter — for the goodwill of the business, (especially) if there’s no inventory. 

What do they have going for them?

Maybe, just maybe, there’s some leases that are favorable that they may be able to sell, but I don’t see the brand surviving. 

So what is Conway MacKenzie doing to advise its retail clients who are out there watching all these legacy players go away?

To the extent you can get out in front of your landlord, clearly there’s a big fixed cost with brick and mortar. You’ve got employees, suppliers and rent. And if you’re not a Wal-mart or Costco, your purchasing power over suppliers is fairly limited. You don’t have the scale or volume for any volume discounts. Employee costs aren’t going down. Unemployment on the west side — it’s very (low), so you’re not going to pay them less. To the extent you offer health care benefits, those have only been going up recently. 

So what can they do?

The major thing you can do is negotiate with your landlord. But for some concessions here, the likelihood of staying in business is fairly low. If you don’t believe me, read the press. That’s one major area we’ve spent some time with landlords. If the landlord doesn’t have an immediate solution for a new tenant, there’s probably some concessions that can be given to prolong, potentially, the downward spiral — at least until we settle in on the new normal of what retailers and consumers can do going forward.

What does your crystal ball show in the next one to three years for retail in Michigan?

I think the high-end guys — as long as the economy continues to do what it’s doing — you’ve got a high concentration of wealth at the top and they’re willing to go to Saks and Neimans and buy premium brands. I think those people are more inclined to go to the mall and get some service. Ultimately, these deep-discounts stores, it’s going to be very difficult to compete with Costco and Wal-mart. You can buy sporting goods at Wal-mart and Target. They have exercise equipment. I think the future is selling not a commodity, but a service. 

What does that offer to consumers?

I think people will always be willing to pay a premium for consultations, service, a cult following, a place to go where you feel valued. But selling on discount without a high volume like Wal-mart or Target, it’s going to be very difficult to compete. 

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