COVID-19 spurring on 'the Amazon effect' as retailers continue to struggle: MMG Advisors

Mergers and acquisitions have taken a hit amid the coronavirus crisis. MMG Advisors Co-Founder and Senior Managing Partner Allan Ellinger joins Yahoo Finance’s On The Move panel to assess the outlook for M&A and weigh in on the retail apocalypse.

Video Transcript

ADAM SHAPIRO: Turning our attention to another issue, how COVID-19 is impacting M&A, as well as the retail apocalypse. To help us look at that issue, Allan Ellinger from MMG Advisors, the co-founder and Senior Managing Partner joins us. And it's good to have you here, sir.

ALLAN ELLINGER: Thank you. Nice to be here.

ADAM SHAPIRO: So-- so let's talk-- there's a great deal we could talk about here, but as we see this contraction in retail, there's-- the sales that took place are still hopefully going to be there at some point in the future with fewer players. So I would imagine someone's going to want to come in, perhaps, and buy this up. Or we going to see those who survive just shift their business model as they should have done to more online? Which is it?

ALLAN ELLINGER: I think it's a little bit of both. But I think the-- some of the existing players that are out there are going to refine their businesses, amp up their ability to drive their DTC businesses, and invest in improving the retail experience at brick and mortar while at the same time driving DTC. The expense of-- the ticket of entree is pretty expensive. It's pretty high.

The current market will give people some opportunity out there to pick up some retail businesses. But you've got some pretty powerful brands who are going to try to turn their businesses around. Unfortunately, some of these companies are burdened with too much debt, which is why you're seeing some of these bankruptcies happen right now.

There are a lot of stores that were-- or a lot of bankruptcies have been blamed on the Amazon effect. But quite frankly, I think that's only part of the problem. The fact that some of these retailers were so highly leveraged gave them an inability to invest in their-- their brick and mortar experience, as well as their DTC experience. They were just too hampered by paying too much in interest, not enough to be invested in CapEx.

JARED BLIKRE: Jared Blikre here. There's a lot of focus on the bankruptcies, of course, and the horror stories, but also just trying to shop online on Amazon, it's very difficult to find items, shipping times are longer. So personally, and I know a lot of other people have been doing this, is exploring other businesses that can ship that are nearby and still receive packages within a reasonable amount of time. Is this possibly a net good for certain small businesses? Can you comment on this dynamic?

ALLAN ELLINGER: Absolutely, it is. As you go through-- I was on LinkedIn last night looking at a number of the smaller companies that have popped up who are presenting product, some of the smaller specialty store businesses or specialists who have gone into business over the last year or two, who are-- who have got great service, great product. They have a reason to exist.

So yeah, I think they're going to give Amazon a run for their money. It's a lot more convenient to shop on some of these smaller sites, and you can find a product that much easier, and you know precisely who you're buying it from. So yes, I think they're going to get a run for their money.

DAN ROBERTS: Allan, Dan Roberts here. As we look at some of these bankruptcy filings, and you look at some of these companies that, as you mentioned, they were hurting before coronavirus, and I also don't think they can totally blame Amazon, but there's J Crew filing. There's JC Penney. Now, of course, filing for bankruptcy doesn't mean you're going out of business, and it can be an--

ALLAN ELLINGER: No.

DAN ROBERTS: --effort to survive. I'm curious which of these companies you think will actually be able to emerge from this and survive for many more years and which of these are just kind of extending and delaying the inevitable, and they're zombies and eventually they're going to disappear?

ALLAN ELLINGER: Look, I'd like-- if I could be a sage, I could answer that question and tell you who's going to be around and who's not. But the reality is, if you start with the basics, a retailer has to have a reason to exist, first of all, it's got to have a point of view. And the fact that you see so many stores going out of business-- if you take JC Penney, or even Macy's for a moment even though you didn't mentioned Macy's in the mix, we're over-stored.

So right now, you would have-- if you take a look at a typical department store, whether it be at a Macy's level or JC Penney level, you have the A level, B level, C level, and D level stores. Those kind of account for the size volume they are and what demographics each of those-- those stores serve. Quite frankly, the C and D stores probably have no reason to exist. They don't-- they don't draw enough traffic and then they're-- and they're eating of resources. So if we consolidate the number of stores that there is in America, and by the way, if there's less inventory sloshing around the system, everybody will benefit.

ADAM SHAPIRO: All right.

ALLAN ELLINGER: So-- I'm sorry.

ADAM SHAPIRO: No, no. Finish your thought.

ALLAN ELLINGER: No. I'm-- that's OK.

ADAM SHAPIRO: OK. Well, we appreciate you being here. Allan. Ellinger, MMG Advisors co-founder and Senior Managing Partner. All the best to you. We'll be right back.