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Roundtable

Roundtable: Bankruptcies, with a silver lining

It was a week of bankruptcies, including a surprise bid at JC Penney by Simon Group. Peter and Rob deep dive on what innovation may result from these painful transformations.

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TRANSCRIPT

Peter:

Welcome to unpacking the digital shelf where we explore brand manufacturing in the digital age.

Rob:

Hey everyone. Peter Crosby coming to you from the digital shelf institutes Cape Cod office. Rob's in the Berkshires. Hey Rob. Well, I'm just going to rip the podcast episode bandaid off here. Bankruptcies dun dun dun, this week had more piling on top of the already announced JC Penney and Neiman Marcus. Yeah, the good news. I mean, there's some silver lining here that some of these brands may very well live on, but let's just do a quick run-through of what, what happened this week. Um, uh, I'll take the first furniture and home goods, pier one, uh, Ayesha Al Muslim at the wall street journal, uh, wrote that, uh, an equity from retail e-commerce ventures, LLC. Um, bought beat out Sycamore partners to purchase pure one, uh, and they've purchased dress barn and Taylor lane Bryant. So, uh, linens and things, Franklin mint. So, uh, this, this ventures group is definitely on a roll and then apparel had a ton this week, right?

Rob:

Yeah. I mean, Brooks brothers leading, I think the list in terms of how iconic it is, it's the oldest men's clothing in the United States founded in 1818 owned by an Italian billionaire. And so that's, it's been around for over 200 years

Peter:

Sort of, um, sort of grim fact, uh, Abraham Lincoln wore their suit, uh, the night he went to the theater. Yeah. So there's that. And then I, of course in a similar death, uh, wore a pink polo shirt and a blue Oxford when I asked out a date to the junior prom and was turned down. So there's, there's the history of tragedy with Brooks Brothers.

Rob:

Yeah. I mean, all my, all my original suits were all Brooks brothers, and now they've gone through the last 10, 15 years consolidation, uh, purchasing up a couple of their major competitors. And this is a brand where, you know, to, to, to your point on brands that will come out of their bankruptcies. Um, the Brooks brothers is a brand that will come out of their bankruptcy. It's a household name.

Peter:

Yeah. According to the, to, uh, to, um, Jacob bogey and Ababa Tara and the Washington post, um, they, uh, they actually have a bunch of bidders, but it just because of COVID the sale the bidding had gotten put off. And so they declared bankruptcy, just kind of put out a box around things until they work it out. But I mean, just there's so much change a parallel way for them particularly it said sales of men's formal clothing fell 74% in the second quarter. I mean, no one's buying suits right now. No, one's updating their wardrobes with all this stuff, all the stuff we know. But I do think that that's gonna, that's a brand that can last,

Rob:

You know, the big risk to them. And actually bankruptcy gives companies a lot of, lot, a lot of latitude to change the way that they do business and to make hard changes that otherwise are difficult to make that entire sector, for example, is less important than it was 25 years ago, 30 years ago, 40 years ago on some timeline, everyone wore suits when they went to work and nowadays athletes are, it's huge. People wear hoodies and t-shirts when they go to work. And especially people working at home, people wear their bathrooms, but they go to work and, you know, you've got companies like Levi's that are better release that are releasing like at leisure, like denim sweatpants, things that, you know, it's denim, but it's a sweat pant that you can wear when you're working at home because no one can see you from the waist down.

Peter:

And, uh, there, there is an interesting question that a Brooks brothers has, which is in bankruptcy. What bets are you making about the future of men's fashion that will enable you to be a much stronger company coming out of it? Like, are you, we're gonna double down on formal wear or, or are you gonna start introducing new categories within your stores that are maybe more reflective of some of these mega trends or what? So I I'm interested to see what companies with a, with an iconic name with really, with lots of really good downtown locations, um, with people that are loyal to them that have been wearing their clothes for years, what they're going to do

Peter:

Transition and how do they evolve their, their brand and their target audience. And, you know, particularly in this time time of sort of diversity and inclusion, I mean, Brooks brothers has that sort of storied, you know, for Hamptons preppy kind of background. And I, you know, I think of that sort of an, uh, in Talbots too, like w how are these brands that have been sort of relatively stodgy and the niche? Are you expanding that niche? Are you doubling down on it? And, and how do you do that? I think it's going to be, it's going to be a really interesting evolution to watch, I think.

Rob:

Yeah. And it's funny, you, you go back in their history and I'm on Wikipedia right now. And they were really innovative company for a long time. And in 1849, they, they launched the first men's formal wear, ready to wear line. They created a, um, Ivy league Zack suit in 1895, Harris Tweed in nine 1900. The Shetland sweater was one of their inventions in 1904. The polo coat in 1910 are Giles' socks and Argyle socks. You know, this is

Peter:

No, that's a lot of innovation. You're absolutely right. And we, and we forget that. So what is this, you know, I think the innovation right now is happening elsewhere. Ken Brooks brothers be revived by, uh, by this, by this acquirer.

Rob:

Yeah, it's, it's, it's notable that between 1957 with the Argyle socks and present. The only thing that they've introduced is the non-iron a hundred percent cotton dress shirt in 1998. So I think this is, this is representative of a general trend for a lot of brands where their storied brands they've been around 80 a hundred, 200 plus years. In this case, they've got a lot of early innovation in the company, and then they just ride a business model for a long time. And it feels like a Brooks brothers would be well served to get back to more of its innovative style setting roots instead of just simply riding the relatively inexpensive off the shelf clothing.

Peter:

Yeah. And the other couple of bankruptcies we saw in the apparel space were, uh, lucky brand and G-Star raw. And I think it's, it's a story of death and rent, you know, but they they're, they were already saddled by debt and now landlords aren't right. Interestingly enough, I'd rather, I'd love your perspective on this. Landlords do not seem interested at all in renegotiating rents, uh, or at least maybe to the extent that, uh, that they're looking for. And I, I wonder if that's going to continue to be the case as a lot of these stores just bow out, but they, but, um, both, I think both of these have, uh, bitters that are looking at them. So neither of these brands, at least right now appear to be going away just restructuring.

Rob:

Yeah. These are, these are good brands. It's not going to be like Toys R Us, which basically disappeared. Yeah. These are good brands. I mean, the, the risk is that the landlords are playing. It's a little bit of a, it's a little bit of a game of roulette here where musical chairs, um, just to get, get back to that. I personally don't think that they can maintain the rents that they've been pushing on for so long. I think a lot of landlords have benefited from urbanization. A lot of people cramming into smaller areas, making land and square footage more valuable over time. But, uh, Benedict Evans, formerly of Andreessen Horwitz, uh, has a really great graph in his recent global tech presentation where he, where he shows the square footage per capita in retail of the United States versus any other developed country in the U.S we have roughly 24, 25 square feet of retail per person. Whereas if you look at the UK, they have five square feet of retail, per person in France. It's four in Germany, it's two and a half square feet of retail per person. So we're literally 10 times the amount of store space that Germany has per person. And then on an aggregate basis, it's many more times than that because, you know, Germany's is a much smaller country than the U S and it just feels like we're over retailed. It feels like physical space and there has to be a correction. So what are the things that people have been talking about over the last 10 years? Is this corrections going to happen? When is it going to happen? The correction is going to happen, but the rents are, you know, keep going up. And the, the companies, um, the Brooks brothers or JC Penney's, or whomever, or Sears famously does crazy financial engineering to just keep the ship afloat and keep making the rent payments and so on and so forth. Then at some point, the music stops and you gotta sit down and I don't know, this, this feels like the beginning of a, of a tsunami of, right.

Peter:

Yeah. I mean, not nothing stops the music faster than a pandemic plus a recession. So I think if anything was going to do it, it's now a pandemic,

Rob:

The resession in which it's, it's pretty, I don't know you might disagree with this, but it feels pretty clear to me that the foot traffic in a physical store is going to be smaller for like a year. I mean, it's, it's really hard to see any timeline less than a year in which foot traffic matters. And so if the foot traffic is down, if the in store purchases are down, there's just, no, you can't afford the same per square foot rent payments that you were previously paying. Something's gotta give at some point.

Peter:

Yeah, no, I, I, I totally agree. And just particularly since so many of the stores in malls are apparel, you know, they're saying analysts expect discretionary retail sales to remain below 2019 levels past next year. So I think it's, you know, it's, it's even 20, 22 that we're, you know, that we're kind of dealing with here. It's, uh, yeah, that'd be tough. You might actually see it longer than that, depending on the macro trends. So, I mean, one thing that we've done

Rob:

And I've read a bunch of stories that this is quite common is in quarantine, you start cleaning your house up, you know, you go through all your old crap. And so my, my, my wife and her parents have sent, I don't know, maybe a dozen jam packed thread up bags to thread up. We're thread up as this service where you can send your used clothes and other people can find them and you can get paid for all of your old clothes, right? Especially if the clothes are nice or not, or you can just donate them. And so this, I think a lot of people are actually participating in these online used clothing markets in a way that they weren't previously. And it's possible that for the next year as more and more, especially for apparel, right? People don't want to try on clothes. The virtual try-on mirrors are not everywhere and they're a little glitchy. And so, you know, you could see a world in which people are moving more towards the used model, in which case, like maybe a lot of these traditional retailing, clothing experiences, department stores, and whatnot just never recovered with 2019 levels. Well, that's where I feel like the, uh, the latest news from JC penny is so interesting, right? Um, that the Simon property group owner of about a billion exactly. I was looking, I was looking to see if I had a number, but who needs it? It's all of the malls, are talking about owning bankrupt, JC penny in order to be able to redevelop some of that real estate and, and create new experiences and mixed use elements into the properties that they own.

Peter:

So they want to take more control over the experience inside of their properties and figure, you know, picking up penny stores at pennies on the dollar. Uh, you got that. Uh, Oh yeah. Um, cause, uh, Simon has a penny store in about 50% of its U S malls. Um, and the land value of Penny's own stores is estimated to be worth more than a billion dollars. So there's a, this is a kind of a big deal, which is, is maybe where the shifts of, how is the retail experience going to bring people back. Simon wants to take control of that. It sounds like.

Rob:

Yeah. I mean, the it's, it's an interesting Batman. I mean, Simon is a, is a real estate company at heart on some level. And they, they own all these malls. And on some level you can either become a utility and just return profit to shareholders and just ride your dying industry all the way, all the way down that way. Or you can play to win and try to return to growth and re and reinvent what it is to be a mall. And Simon mall is Simon. Simon property group is trying to do the latter. They're, they're trying to take the insane glut of square footage of physical retail that we have and transition it to more of an, of an experience rather than just a shopping experience. So they've been doing this for years. They've been introducing more restaurants and climbing walls and LA Fitnesses and all this type of stuff where, you know, you can go to the mall and you could spend a day, and it's not just a shop. I, I don't personally understand at this point what owning JC penny would do for them other than, uh, help them maintain anchor tenants and some of the really big spaces and a bunch of their properties. You know, it's possible that if Simon doesn't purchase them, JC penny just decides to liquidate. And all of a sudden you've got a bunch of empty space that's harder and harder to fill. So there's this, I'm not really quite, quite sure what the strategy.

Peter:

Yeah. Cause it's weird. Cause it's, this is their third takeover. Recently they bought Aeropostale, uh, in 2016, uh, with Brookfield and authentic brands group, they, they bought forever 21 for 81 million and, and their partner in may also be the authentic brands group is also a partner in this purchase. And the CEO of that, Jamie Salter told CNBC that, uh, he viewed it penny as a brand worth saving. And he said, I think there's a play for JC penny. I think JC penny needs a purpose. And I have my ideas on what it should be. So it's a little cloudy right now. Cause in some ways it seems like what, what Simon's talking about is sort of owning the square, the taking back the square footage, essentially to be able to, to do something about it. But then there's also this investment in apparel retailers. So yeah, it'll be, be interesting to see what the, what the outcome of all this investment is.

Rob:

Yeah. I mean, there's, it could be a great financial outcome where JC, penny ends up a much smaller company than it is right now. Yeah. Um, I mean you, there's a, there's a private equity firm called Sycamore. That's been buying a ton of retailers. They bought staples, they bought, um, Belk down, down in the South, um, you know, about a half a dozen other other major retailers. And these are all these they're buying retailers in sectors where, you know, the bed is that they're just not going to do as well, going forward. So staples, for example, is just getting crushed by, by Amazon, uh, at the top on the mass market. And then they're being beaten on service by WB Mason and, and, and others in the regional markets. And it's, it's a tough place for them to be. And yet Sycamore invested in them and they're not idiots. So they, you know, they see a future for staples, at least that returns their investment on taking them private.

Peter:

Yeah. And if you erase the debt in the Oh, the process. Yeah.

Rob:

Well sometimes they saddle them with additional debt in order to restructure. Right. Um, I mean, you know, there's staples really has three different businesses, right? They've got the B2B business, they've got the BDC business with the storefronts. They've, they've got Canada and a lot of people were talking for a long time about two of those businesses as a future. And one of them does not. So you could, you know, you could spin them out where you can have two, two businesses that look good, one business that looks bad and that business ends up failing. And, and for the owners that could be financially a good outcome all around. So I don't know what Simon's thinking here, but I will say that my favorite story that I've read what JC penny should be and what JC Penney's was and could be again, was a story that featured Marvin Ellison, uh, formerly of home Depot. Now the CEO of Lowe's when he joined JC penny after the Apple executive that started in ran, Apple stores was fired from running JC penny or Marvin Ellison was trying to reinvent what JC penny was again. And he would go into the stores and talk to all the shoppers. And, uh, it's a, it's a heck of a story we'll link to it in the show notes. Um, so it's, you know, five years old, but one of my favorite retail reason, the last decade

Peter:

Well, so Rob, I mean, what does life look like after bankruptcy? What is the, what happens next?

Rob:

Well for listeners that have heard my rent at festivals before on this subject, I, I I'm actually pro bankruptcy. It's like a really healthy forests need that fire every once in a while to clear out things that should no longer be there and give new life room to grow. And capitalism is really based on creative destruction. And by clearing out some of these older retail models that are in a lot of ways, not, not as relevant to the modern shopper is as they were 50 years ago. Um, it gives a lot more room for new types of retail experiences to come up. I mean, I was listening to a tremendously good podcast with one of the founders of the Alinea group in Chicago. Alinea is the best restaurant in America, according to most people. Um, some say some have said that it's the best restaurant in the world at various years. And, um, it was an interview with, with, uh, on the Tim Ferriss show. And he was saying that a lot of restaurant groups have gotten fat and happy, but in the last 15 years, just due to the boom of people going to restaurants, and a lot of them don't deserve to survive. They're not great businesses and they're not great restaurants. And by a lot of them going bankrupt, what's going to happen is the rent are going to go way down and you'll get some brilliant 24 year old chef who maybe really wanted to start her own restaurant and couldn't afford the rent. And now she's going to be able to get her own space that was abandoned by one of these over leveraged, overextended, poorly managed restaurant groups and get started. And that's going to be the next Alinea in the United States. And so my, my feeling is the rents are really high, you know, there's that whole internet rent is too damn high and all these bankruptcies and the right setting of the square footage per capita in the United States doesn't mean that the, the space, the physical spaces disappear. I mean, the buildings have been built. Uh, what it'll mean is that what people will use that space for can use that space for can be more varied because they're going to be cheaper. And so it's possible that that one, one future here is that all of a sudden there's a lot of space and we have a country full of very creative, innovative people, and they're going to find a way to make that space valuable and interesting, and it's going to be different than it was before. And that's great. So that's, that's my view on the macro picture of it. And then the other, the other thing I'll say is that you're already seeing new business models take off in this, Instacart, just raised at a 14 billion valuation. Instacart was under a lot of scrutiny with the WIWORK explosion. As you know, man, are the unit economics ever going to work for Instacart? There's just picking costs are too high. They're never going to make money. Grocery deliveries dead. Like all they're doing is burning VC dollars, blah, blah, blah, blah, blah, blah, blah, blah, blah. Instacart was profitable and Q2. And they just put some more money in the bank and they're growing like crazy. And so, you know, this is the moment that a lot of those companies have been waiting for and it makes the, makes the model viable and it creates a meaningful competitor to, to Amazon in that space. Um, and in fact, and in fact by the grocery, number's a larger competitor, the Amazon. So I don't know, I think there's, I think there's this, the destruction that we're seeing now and all these bankruptcies is the beginning of the next era of whatever's going to come. And I think I'm pretty excited for it.

Peter:

Yeah. I mean, these are the moments that create, uh, entrepreneurship and innovation and, and, you know, but also have to acknowledge there's going to be a lot of pain on the way to those green shoots coming up, you know, a lot of jobs, a lot of, a lot of bankruptcies. And so I think, uh, it'll be, it'll be at some point a great time to be alive, to watch all of these new things happening. Um, and we've just got a path to go on before we get there, but it's nice to see some of these potential things start to, to turn like Instagram. So, uh, with that a little bit of optimism, that's it for our podcast today. As always, if you enjoy the show, please leave a review wherever you get your podcast. And thanks as always for being part of our community.