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How has technology affected the retail industry in your jurisdiction. Are you seeing more insolvenci

September 2019 - Corporate & Commercial. Legal Developments by IR Global.

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The following article discusses session one in the IR Global Virtual Series on 'The Retail Apocalypse'.

U.S, Illinois - Robert Fishman (RF) There's no doubt that developments in many industries cause change, and change generally results in winners and losers.

The retail industry is certainly going through that kind of evolution right now. Ten years ago, when people wanted to go shopping, they hopped in their car, drove to a mall, walked around and shopped.

During the last 10 years there's been an incredible change in the shopping habits of people. Online shopping has become the norm and the challenge for traditional retailers has been how do they adapt to that changing environment.

I've seen various companies around the United States catch that wave early - Target and Walmart being good examples. They are retailers who seem to understand that the traditional model alone was going to be problematic and so they have combined the traditional retail approach with the online shopping approach that has become so popular.

Other companies have either been slow to react, or haven't reacted at all. The company that I have had the most experience with is Toys R Us.

Toys R Us thought it was catching the wave of online shopping, but what it discovered was that Amazon had set the bar pretty high. You cannot succeed in the online shopping world unless you are competitive with Amazon. This means tremendous selection of product, great customer service and free next day delivery.

That's a challenge for a traditional retail business because it’s not the sort of structural model they have operated under. Toys R Us wasn't sufficiently successful in doing that, and I would say that its inability to compete with the Amazons and Targets of the world played a significant role in the demise of the Toys R Us franchise in the United States.

Technology is a serious challenge in the retail industry for those retailers who are not such a brand that people have to go to the store to buy that product. They're all going to have to continue to adapt to this environment and figure out a way to be competitive in an online world.

Canada - S. Fay Sulley (FS) In Canada, we also have Walmart and other large brands. Those companies have all had to develop a significant retail online experience for shoppers. That includes companies like Home Depot, because if you're supplying anything that people need for their homes you really need an online presence. For the younger demographics, that applies to clothing as well.

Our firm has just acted for two companies that ended up going bankrupt last year. One was called Bombay and the other was Bowring. They had been around in Canada in various iterations for over a hundred years.

One of them was selling furniture and one of them was selling household goods such as wine sets and glasses and dishes and anything you can imagine in an upscale home store. Those stores had not developed an online presence and they just couldn't keep up with the other competitors in the area that were selling online.

It was very sad, because they've been in Canada for so long in many secondary locations across the country. There was over a hundred stores, and it really affected the class B landlords. There was a real loss to the mid-sized towns when Bombay and Bowring went under, and there's a trickle-down effect from that in the sense that they were a lot of job losses in those areas.

The clothing sector is taking a bit of a hit here in Canada as well, since we keep seeing clothing stores go out of business. I have no idea why that is, but they are not getting the online shopping that some of the larger stores are getting.

Some of the smaller clothing chains don't know how to get into Amazon, while the cost of selling through Amazon is higher than they had anticipated. They haven't really gotten their costs or margins set correctly, so that they're able to pay the fees that are payable to Amazon.

U.S, Illinois - RF It is a complicated process and it does require the devotion of a certain amount of revenue, but I think its probably logistics more than cost.

Cost is a factor in anything and they have to devote revenue to one thing, which means they can't devote it to another. My experience has mostly been that they don't catch on to the logistical game fast enough. They don't position themselves to have the right products available at a competitive price.

England - David Foster (DF) Technology is certainly one great factor that's influencing some of the issues arising in the UK.

The Arcadia Group is an interesting example of a giant retailer experiencing this problem. It has 520 shops and brands including Topshop, Selfridges, Wallace and Dorothy Perkins, and has seen sales decline swiftly. This is largely because younger shoppers have abandoned its brands in favour of online fast fashion rivals such as Boohoo, where sales in the UK are up 27 per cent.

Boohoo has got brands like Pretty Little Thing and Nasty Gal, which is cheap online fashion, with intensive online marketing and celebrity endorsement. It is fascinating to note that they spent GBP80 million on marketing last year and booked a GBP60 million profit.

Costs in the UK are a problem and online does help with that. Arcadia had problems with salaries, rents and pension costs under the traditional model. They were paying GBP50 million per year in pension contributions, which is quite something.

Boots is still making a profit with a traditional business model, but they're really struggling in many ways, with profits down 18 per cent this year. It's seen shop footfall reduce, as younger customers go online. It is trying to reinvent its makeup counters and has signed a deal with Rihanna to manage her beauty range.

There's also a genuine worry in the UK around zombie businesses that don't have the money to invest in meeting some of these changes.

Relative regional and geographical disparities exist in the UK in terms of areas where retail has continued to thrive. For example, particularly in former industrial towns in the North, the rate of high street store closures has been alarming, measured against the relative resilience of productivity in southern commuter towns and cities such as Guildford. Whether this trend will continue remains to be seen, particularly with the UK Government's repeated promise to inject life (and funds) into its “Northern Powerhouse”.

On the positive front, there were 34,500 independent high street shops opened in the past year in the UK, up 4.5 per cent on 2017 figures. It seems that owners with a passion for what they do and their communities will have a degree of success, but it's not easy.

Belgium – Philippe Termote (PT) I'm based in Antwerp and we're seeing the same kind of movement. Our law firm has been representing a lot of textile producing companies, and over the last 10 years we've seen a shift in retail.

There used to be a lot of multi-brand stores where production was retailed, now, since the new technology, we've seen boutique or multi-brand stores gravitate to expensive streets. Large fashion brands used to work with boutiques or multi-brand stores, but they have stopped working with them due to unpaid invoices.

Today we see that they've done a shift to retailing their own products. They get a big flagship store where it is possible for customers to buy and try on the clothes, but they have a much bigger revenue coming from their own websites. They will also sell via fashion websites with big followings, giving the potential for significant marketing and high budgets.

This has also allowed them to deal with some logistics problems, because we've seen some smaller websites which cannot cope with volume. From that point of view, the high streets are still expensive because the landlords are not willing to let the lease prices go down. In those big streets, more of the boutique’s stores are empty at the moment. If demands fall further, the landlords will have to do something.

We have also seen a lot of pop up stores, which will work for those who have a good marketing concept and are passionate about their products. We have a lot of millennials buying those products, and if you're not adapted to the millennial you will be out.

England – DF Have you found pop-up stores be successful in Belgium?

Belgium – PT Only to support other forms of distribution or to raise a product’s profile in the market.

Canada – FS We see little independents using pop-up stores here in Toronto, where they're just going out to get their merchandise known. They are usually located in places that would otherwise be vacant in any event.

Australia – James Conomos (JC) In Australia, the position has been similar with globalisation hitting the Australasia region. There have been many corporate collapses including Roger David Menswear – 57 stores closed in late 2018. Other companies have used Australia’s insolvency laws to restructure either for ongoing trading or sale.

Historically, Australia was spared from global competition due to its remote location but that has changed with the advent of technology. Global brands such as H&M, Zara and Uniqlo have raided Australia providing stiffer competition.

Another significant issue for Australian retailers, apart from global competitors entering the market, has been competition from online retailers. It has been suggested that online spending in Australia in 2018 increased by 24 per cent, which is claimed to comprise AUD27.5 billion in lost sales from traditional retailers.

France – Yves-Marie Ravet (YMR) I think that the retail apocalypse that my colleagues have noticed in their respective jurisdictions is a global movement that particularly affects France. A number of dematerialised commerce and innovative applications have gradually affected physical commerce.

I would also mention the restructuring of Toys R Us, where the French subsidiary also suffered from the difficulties of the American group. The opening of a safeguard procedure (sauvegarde judiciaire) and then a judicial recovery procedure (redressement judiciaire) led to an exit from the top through the takeover of the subsidiary by PICWIC group belonging to the powerful Mulliez family.

Beyond this particular case, retail players, like in any other sectors of activity, must tackle the challenge of technological shifts or risk being pushed to the margins.

In this respect, it is worth recalling what happened to Kodak in the early 1990s when the transition from film to digital was not anticipated.

French restructuring practitioners have carefully monitored the recent bankruptcy of the Sonia Rykiel group. This is another example of bankruptcy in the retail sector resulting from the explosive mix of finance and industry. No buyer was found, so the commercial court of Paris decided to open a liquidation.

It should be noted here that the profitability logic of financial investors does not always correspond to retailer business models. The bankruptcy of the Rallye group (Casino's supermarkets) is also an example of how hyper-debt on the stock markets does work for with retail businesses.

As a fellow entrepreneur, I would advise retailers to anticipate. Anticipation is the key word in entrepreneurship. As lawyers specialising in insolvency matters, we intervene downstream to try to treat illnesses when the situation is already compromised. In this respect, anticipation is also very important because the more solutions that can be implemented upstream, the greater the chances of rescue.

In France, we have a powerful tool that allows the debtor to negotiate almost informally with his main creditors in the context of conciliation. This conciliation will result in either the establishment of a settlement protocol, or the opening of a safeguard to force recalcitrant creditors to vote on a debt settlement plan which will make it possible to reschedule claims over time (maximum 10 years).

Last but not least, a sale in the particular context of a recovery procedure (redressement judiciaire) remains the preferred remedy when the retailer's business model appears completely obsolete, but a buyer is still interested in the debtor's tangible and intangible assets.

CONTRIBUTORS

Philippe Termote (PT) LIGE ADVOCATEN – Belgium www.irglobal.com/advisor/philippe-termote

Yves-Marie Ravet (YMR) Ravet & Associés – France www.irglobal.com/advisor/yves-marie-ravet

Robert M. Fishman (RF) Fox Rothschild LLP –U.S, Illinois www.irglobal.com/advisor/robert-m-fishman

S. Fay Sulley (FS) Torkin Manes LLP – Canada East www.irglobal.com/advisor/s-fay-sulley

James Conomos (JC) James Conomos Lawyers – Australia www.irglobal.com/advisor/james-conomos

David Foster (DF) Barlow Robbins – England www.irglobal.com/advisor/david-foster