Barney's Bankruptcy Leads to Store Closings
Once upon a time, Barney’s was the ultimate expression of the fashion shopping experience in New York City. Great styles showcasing new designers were merchandised beautifully in its 7th Avenue store in the heart of the Garment district. Sadly, Barney’s filed for bankruptcy on August 6, attributing it to the tough retail climate.
Barney's also suffered the loss of a dispute with the landlord of its Madison Avenue store, triggering an increase in annual rent from $16 million to $30 million. The Madison Avenue store was said to be responsible for almost one-third of Barney’s revenue, hence the impact on the overall business from struggles at that location.
In its bankruptcy filing, Barney’s stated a plan to close 15 of its 22 stores and makes it the most recent fatality among large retailers, this time a luxury brand retailer. The bankruptcy also possibly marked a final frustration for Perry Capital, the hedge fund operated by financier Richard Perry who took control of the company through a $540 million debt-for-equity swap in 2012. Perry Capital closed its fund in 2016 but had continued to control Barney’s in the retailer’s quest for financial health.
Hedge funds and private equity firms have been blamed for a significant portion of large retail failure. A study released in July 2019 by the Center for Popular Democracy detailed the recent legacy of hedge fund participation in the retail industry.
Is Private Equity Responsible for Major Retail Bankruptcies?
According to the study, 10 of the 14 largest retail bankruptcies since 2012 involved private equity owners. The study documents the impact on retail employment as nearly 600,000 jobs at U.S. retailers owned by private equity firms and hedge funds have been lost in the past decade. The potential for more employee pain is real, as the chains owned by private equity groups employ more than 1 million of the 15.8 million U.S. retail workers nationwide according to the study.
According to an article published here on CNBC, Barneys CEO Daniella Vitale told employees earlier this year, “The entire industry is in survival mode ……. the model is not working, it’s not working for Neiman [Marcus], it’s not working for Saks, it’s not working for us, it’s not working for Nordstrom.” The Barneys executive is right that all luxury brands are facing the shared challenge of ecommerce and the unknowns of retail industry transformation. After all, even a “luxury makeover of cannabis” couldn’t save Barneys.
What’s the outcome of this retail transformation going to be? And, what can be learned from the latest bankruptcy filing by a “name” retailer?
The New World of Retail
The new world of retail, as expressed in shopping malls and some main street environments, might be smaller high touch “showcasing” stores that allow customers to experience a brand and sample merchandise. Stores of this type are already being adopted by direct to consumer brands Casper, Peloton and others; and, notable legacy fashion brands like Barneys could find success with a similar format.
Placing people and selected merchandise in lower overhead environments to showcase a brand can open the opportunity to create the relationships that have been lost through debt-fueled growth plans. Showcase (kiosk / pop-up / whatever you like) stores can stimulate conversion from visit to online purchase and be a center for trial, delivery, and returns.
For retailers, what’s left to lose? Standing pat is equivalent to waving the white flag to online retailers. Creativity and experimentation in previously unthinkable models might be what it takes to turn the tide for traditional retail.
What do you see happening next?