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3 reasons why retail brands fail and fade away

The retail graveyard is littered with headstones of some favorite places to shop.

The flawed businesses of once iconic retailers J.Crew, Neiman Marcus, J.C. Penney, and Lord & Taylor have been exposed via high-profile bankruptcy filings. Now, the coronavirus pandemic has added even more uncertainty to an already tenuous retail landscape.

The video above details three big reasons why iconic brands go from being on top of the retail world to heading 6 feet under.

Full transcript below:

The retail graveyard is littered with headstones of some favorite places to shop.

Who didn’t enjoy buying double-A batteries for a new Sony Walkman in the late 1980s at RadioShack? RadioShack effectively died in 2015 after years of irrelevance.

Blockbuster was a great place to rent a $5 movie for a stay at home date night. Then came Netflix and chill, and the death of Blockbuster in 2010.

Sears was Amazon before there was Amazon. But today, the U.S. is full of vacant Sears stores after its 2018 bankruptcy at the hands of the modern-day Amazon.

And now a new crop of former heavyweight retailers is about to be wheeled into the graveyard after the COVID-19 pandemic shuttered stores nationwide for months. In doing so, the flawed businesses of once iconic retailers J.Crew, Neiman Marcus, J.C. Penney, and Lord & Taylor have been exposed via high-profile bankruptcy filings.

Why do retail brands die in the first place? Here are three big reasons why:

Reason No.1: Horrific management

Having great management in retail is essential to consistently winning. And no one in retail exemplified horrific management better than hedge fund manager Edward S. Lampert, better known on Wall Street as Eddie.

Lampert merged Sears and Kmart in an $11 billion deal in 2004. He stuck himself atop the merged company as CEO despite having no true retail management experience. Lampert closed Sears and Kmart stores across the United States in a failed bid to boost profits and pad his own big, fat wallet. Lampert let stores left open fall completely apart. He showed no real interest in going head to head for business with faster adapting retail rivals Walmart, Target, and of course Amazon.

After years of eye-popping losses, Sears filed for bankruptcy in the fall of 2018. At one point the combined company had more than 3,500 stores in operation. Now they are but a memory.

Sears isn’t the only sad tail of inept management ruining a retailer. RadioShack, Circuit City and Linens N’ Things offer up similar stories to Sears. In all cases, horrific management fails to anticipate the future of shopping and doesn’t understand the present which is not a good place to be if you are a retailer.

Reason No. 2: Too much debt

Retailers love to live on debt. Inventory is financed on credit. Store leases are a form of debt. Bank debt is used to open new stores and refurbish existing stores. This debt becomes next to impossible for a retailer to manage when the economy turns south or a brand falls out of favor with shoppers.

The now-bankrupt department store Neiman Marcus offers up a prime example of how deadly debt could be. Neiman Marcus was bought out by private equity players TPG and War-burg Pincus in 2005 for $5.1 billion. That added a ton of debt on Neiman’s already tarnished books. Then it was sold in 2013 to private equity firms Ares Management and the Canada Pension Plan Investment Board for $6 billion. More debt was added to the books.

The way people shopped for clothes changed dramatically after 2005. Unfortunately for Neiman Marcus, because of its excess debt, it was unable to invest aggressively to transform with the times. Sales and profits went up in smoke. The company filed for bankruptcy in May 2020.

Another good example of the burden of debt is apparel retailer J.Crew, which also filed for bankruptcy in May 2020. J.Crew was bought by private equity firms TPG Capital and Leonard Green in 2011 for $3 billion. The buyout saddled J.Crew with way too much debt. The company cut corners on product quality, lost once-loyal shoppers, and couldn’t handle its debt because of vanishing sales and profits with people no longer going to malls that often.

Unless you are Walmart or Target that sells essential goods such as food that keeps cash constantly flowing into the business, retail is too fickle for a company to be saddled with a lot of debt.

Reason No.3: The changing world

Before there was Amazon and Walmart.com, there were department stores. These were the places that for decades outfitted children with back to school clothing and gifts for the holidays.

But then came the rapid advancement of technology in the 2000s, and with it the ability to buy goods and services in the palm of your hands.

To try and survive, the department stores close under-performing stores and skimp on in-store experiences. But that only pushes more people to shop online, which is not good for debt-laden department stores. They walk right into a black vortex of too little sales and profits and too much debt.

On top of the internet, fashion preferences simply change over time. Whereas J.Crew was once popular for selling Michelle Obama’s favorite sweaters, a year or two later consumers are on to another cool brand. That sucks for a J.Crew, who expands too quickly to capitalize on its fame and is now stuck with too many store leases and bank debt.

Then the brand dies and the retail graveyard gets a little bit more crowded.