Consumer Brands as the Biggest Loser to the Weak Economy

Tuesday, 11 November 2008 09:56

Did you ever think we’d see a day with out a Mervyn’s commercial airing on the TV screen and the colorful sign as a staple around busy intersections? Or, a day without a worthy competitor to Bed Bath and Beyond like Linens N’ Things to wander through and waste our Sundays in? And, the most recent edition, Circuit City???? Seriously, some of these must make you wonder, ‘What is going on with the world today?

All the failures have a similar tale; struggling business model with target consumers who were hit hard by subprime housing debacle. Soon, the companies’ vendors started to get nervous, requiring them to pay cash up front for their goods which put more pressure on the struggling businesses, which made the vendors more nervous and led more to require cash up front, which put more pressure on the struggling business, and on and on.

The most recent addition to this tale; Circuit City. The company announced it would close a few stores and scale back to get them through the soft holiday season. Unfortunately, as soon as the company’s weakness became public knowledge, it seemed virtually all of the stores vendors made a run for cash up front and finally forced them to file for Chapter 11 just about a week later. The company has a $1.1B arrangement with a group of banks led by Bank of America to provide them with some liquidity through these tough times, although any spectator must begin to wonder if they’ll survive.

Remember, it was just May of 2008 when Linens N’ Things filed for Chapter 11 (which gives them the ability to stay in business and reorganize the company in hopes of recovery) and July of 2008 when we heard similar news from once-retail-giant Mervyn’s. Both of these believed they would buoy themselves through the end of the year and bounce back in 2009. How it really played out? The only bidders for Linens N’ Things were the 6 largest liquidators in the country who submitted a combined bid of $475 Million to get their paws on the stores assets and sell them off. And for Mervyn’s, after closing 26 stores the company realized they still did not have enough liquidity to operate and they were better off to close the remaining 149 locations than try to stay in business.

These are the dire tales of our times….we’ll be holding our breath to see if the #2 consumer electronics giant can battle through although we think the struggles are just beginning. The company has moved from closing 155 stores to filing for Chapter 11 and cutting its workforce by 20% in just a week. To make matters worse, the company occupies a tremendous amount of real estate across the country meaning the landlords’ best bet is to renegotiate their leases to help Circuit City survive; as opposed to the alternative of facing all the stores closing at once and leaving a glut of vacant space for the owners to sit on. Unfortunately, most of this real estate was financed during the CMBS (Commercial Mortgaged Backed Security) heyday meaning the landlords may not have the ability to renegotiate with Circuit City because of their own loan covenants with lenders. Needless to say, this is one domino we don’t need to see fall….

Check here for a full list of store closings as of November 3, 2008.