Scott Bernstein, Co-President of advisory firm SB360 Capital Partners, released the following assessment of the impact of the Coronaviris on the retail sector:
As states begin to slowly lift stay at home directives, each consumer will make their own assessment as to the risks presented by resuming activities previously considered mundane and absent from peril. It’s safe to assume that early on and certainly in the hardest hit regions of the country, avoiding crowded venues will become a priority for shoppers. By contrast, liquidation sales are, by design, loud and fast moving events structured to attract as many customers as possible for the purpose of selling as much merchandise as possible in the shortest possible time. Suffice to say that the continued practice of social distancing will likely not be compatible with a successful store closing sale.
While many lessons were learned by the asset-based lending community in the aftermath of the Great Recession, for the most part, portfolio losses were contained. Appraisals generally proved accurate, assets were liquidated in an orderly fashion and secured lenders were re-paid. Needless to say, underwriters and appraisals, then as now, did not take into account the risk of a global pandemic and the challenge of attracting customers to a crowded store with the perceived risk of contracting a potentially fatal virus.
If you’re thinking all is lost, think again. Like Chief Martin Brody chartering a local salty fisherman’s boat to go after the killer shark, liquidators are nothing if not a resourceful group. With thoughtfulness and creativity, inventory can and will be effectively sold off. As both liquidators and operators of various retail businesses, there are a number of initiatives we have recommended to our clients and implemented in our own stores
Customer Safety
The obvious first step in attracting customers back into stores is offering assurance that their shopping experience will be safe. Requiring the wearing of masks by customers and store associates where mandated by local law and perhaps offering coupons to those wearing masks by choice will help to create an atmosphere of perceived safety. The ready availability of hand sanitizing gel at the entry way and checkout stations will allow customers to move through the store handling and paying for merchandise without risk of exposure. Where possible retailers should re-configure store fixtures so segregated checkout lines can be created with retractable belts or velvet ropes creating an invisible barrier between those shoppers still browsing and those waiting to pay for merchandise. As is commonly done now, the floors of checkout lines should be marked with reflective tape placed at increments of several feet to deter crowding. Email blasts should be used to inform customers of these safety initiatives well in advance of store re-openings. It is important to note that, in time, all such initiatives will become standard operating procedure in a post-Covid world.
Inventory Rebalancing
As we have seen, certain regions of the country have been harder hit by COVID-19 than others. Cities like New York, Detroit, Boston, Chicago and surrounding suburban areas will likely maintain social distancing guidelines for the foreseeable future. As retail stores are permitted to re-open in those markets, restrictions on the number of customers allowed in stores will be enforced as will social distancing rules within each store. Under such stringent guidelines, selling through inventory during the prescribed sale term at pre-Covid recoveries will be difficult. Fewer customers per day requires a longer sale term. A longer sale term means increased expenses resulting in a lower net orderly liquidation value.
However, in other parts of the country, there will be little or no such restrictive guidelines. Vast stretches of the country have been less impacted by the virus. In those areas, if there are social distancing directives, they are not being enforced by local authorities or heeded by consumers. It is to these areas of the country that distressed national retailers should begin thinking about mass transfers of merchandise designated for liquidation. Where possible, retailers should consider reducing inventory levels in the hardest hit areas of the country. Perhaps transferring some merchandise from a store in Manhattan to a store in North Carolina or Ohio. If done strategically with the assistance of industry professionals, transfer costs can be managed and significant negative impact to liquidation recoveries mitigated. For those omni-channel retailers also selling online, merchandise may be offered at higher discounts through ecommerce sites thereby also serving to reduce both store inventory levels and operation expenses.
These initiatives and many more have been rolled out by SB360 Capital Partners and our affiliates at Schottenstein Stores Corporation in response to the virus. Furniture stores operated by our affiliate in less impacted markets were among the first to re-open and early indications were encouraging. As restrictions are lifted, shoppers across the country are slowly returning to retail stores with a pent up demand for consumer products and a brick and mortar shopping experience. Strategic merchandise purchases and overstocks have been diverted to less impacted markets and new stringent housekeeping and sanitation protocols have been put into place at every one of the thousands of stores operating under the Schottenstein umbrella.
By taking initiatives such as these, retailers can begin to lessen the impact arising from the drastic changes in consumer behavior. For those of us charged with the responsibility of selling off inventory and insuring collateral value upon which loans have been written, we will be implementing these new strategies and guidelines which over time will become the “new normal” for brick and mortar retailers. Now is the time to plan, reach out to customers with important safety information and implement those collateral value-saving initiatives.