We’ve recently seen an unprecedented number of retail store closings. Retail bankruptcies in just the first half of 2017 have already surpassed the number of retail bankruptcies for the entire year of 2016. If supermarkets follow in the footsteps of other retail segments, then 2017 could be disastrous. Joining the list of bankrupt companies are Marsh Supermarkets Holding, LLC and Central Grocers, Inc., both of which filed for Chapter 11 bankruptcy in May 2017. What does the future hold for grocers? Are supermarkets facing the same demise as other brick-and-mortar retailers?
The good news is that food is a necessity and not a luxury. The bad news is that margins are razor thin and competition is relentless. Grocery stores, not unlike brick-and-mortar retailers, are hanging on by a thread, not just trying to thrive but simply survive in this environment. What is driving such intense competition for grocery stores?
- Food deflation contributed to price wars as grocers passed along savings to consumers; although consumers benefited, the result was even lower margins for grocers
- Expanding and competing retail channels for groceries including other options such as meal delivery service
- Invasion of foreign discount supermarket chains in the US; Lidl is a new entrant while Aldi has announced aggressive expansion plans
- Changing consumer behavior and expectations including convergence of brick-and-mortar and online shopping; delivering perishable and refrigerated goods has some unique challenges
Supermarkets have been somewhat insulated from the online pressures contributing to the demise of some brick-and-mortar retailers. But grocers are no longer immune. As a supermarket operator, are you experiencing these tell-tale signs?
- Unable to meet sales forecast and experiencing declining same store sales
- Struggling with cash flow and forced to stretch payables to vendors or requesting an accrual of interest payments
- Experiencing high turnover including the loss of key management
- Negotiating with Lenders only willing to extend maturity dates on a short-term basis
- Cutting your capex spend in half so you have sufficient cash to continue to operate and service debt
If you are spending more time putting out fires than performing your day-to-day duties, then it probably means that your business is in trouble.
The time frame to act is getting shorter and retailers need to conserve cash — to ensure that the runway is long enough to allow for an operational turnaround of the business or debt restructuring, or risk liquidation. Recognizing the warning signs and taking action early will ensure the best possible outcome and preservation of value.
Stop Hemorrhaging Cash
The first step is gaining control of your cash. This may require applying a tourniquet to stop the bleeding. Be realistic about the performance of your business and understand your cash needs.
- Develop realistic financial projections so you do not fail before you even begin
- Understand your cash needs; prepare a rolling 13-week cash flow forecast to understand immediate cash needs and a long-term cash flow forecast to account for one-time payments
- Optimize liquidity through effective management of accounts receivable and payable; don’t leave money on the table; a simple phone call may be all that’s needed to prompt customers to pay past due amounts
- Involve the entire organization; ask your employees for creative ways to save money; reward them with a pat on the back or provide monetary incentives
The second step is fixing the business. Companies need to assess operations and take the necessary action steps to ensure the survival of the business.
- Identify the problems and find solutions
- Maximize operating efficiency
- Improve margins and profitability
- Stabilize the business
- Set realistic goals and manage stakeholder expectations
- Restore the trust and credibility of creditors and employees
Lastly, you may be operating at higher efficiency, but this may still not be enough to service your debt especially for companies that are highly leveraged. A debt restructuring may be necessary to ensure the company’s long-term viability.
- Develop a plan which maximizes recovery
- Be transparent and provide clear communication to all parties; be cognizant that lenders or investors may be losing all or part of their investment
- Assess whether a debt restructuring can be done out-of-court; this will require consensus which may be difficult given different interests among creditors
- Retain professionals to assist
Our experience tells us time is of the essence. Companies often wait until they have burned through their cash and depleted other resources before taking action. A turnaround specialist or Chief Restructuring Officer (“CRO”) has the independence and can make the hard decisions. Often a company in crisis will have lost credibility and the trust of its creditors and employees. A CRO can build the consensus necessary for a successful turnaround of the business, leaving Management to focus on operations, safeguard the business and prevent further deterioration.
The entry of Lidl in the US, aggressive domestic expansion plans of Aldi and the combined forces of Amazon and Whole Foods will only make it more difficult and disruptive for grocery operators in 2017 and beyond.
Loughlin Management Partners + Company (“LM+Co”) has a team of turnaround and retail specialists that can assist companies in navigating the complexities of the corporate restructuring process.