Are Ongoing Store Chain Liquidations Necessary?

Companies are ridding themselves of business units that are deemed to be weak

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Sep 21, 2017
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U.S. retail store chains are undergoing a modern makeover in a bid to adapt to modern shopping trends. This makeover has resulted in several liquidations and store closures, in the process raising questions about the future of the traditional stores in the market. Retail stores and malls are being liquidated right, left and center as the culture of online retail continues to sink in.

Since the emergence of online retail platforms, traditional chain stores have had a rough time keeping up with consumer trends. Many of the giant retailers have resorted to liquidating several of their stores in a bid to keep operational costs low as sales continue to stagnate.

Examples include the likes of JCPenney (JCP, Financial), Macy’s (M, Financial) and Sears Holdings (SHLD, Financial), which have closed several store chains in the last few years. And to put things in perspective Sports Authority liquidated last year while Payless has already filed for bankruptcy. But do these companies really need to liquidate the various stores and businesses in a bid to stay afloat? Let’s examine this.

Liquidation happens when a company or a business unit is unable to pay its obligations when they come due. This scenario basically renders the company insolvent, and it has no option but to pursue a liquidation sale.

For a business unit, it can simply mean that the specified branch or store has become a liability to the other business units –Â thus the need for elimination. Some companies may call this restructuring, but for the specific business units being closed or sold at book value, it is simply liquidation.

Such processes have become very common lately, thereby creating opportunities for players in the industrial auction market. When it comes to business liquidation, it is hard to find a buyer willing to pay for what the seller believes to be the true liquidation value. On the other hand, industrial auction platforms are likely to fetch the seller the highest value possible depending on the demand.

The U.S. is the world’s largest economy. It is understandable why it also has the most business malls. When you try to prorate this on a per population basis, though, it becomes clear that the number of malls per population in the U.S. is way too large compared to other developed countries.

According to a research report published by Cowen & Co. in the U.S. last year, shopping space per person stood at 23.5 square feet in 2015 with Canada coming in second with 16.4 square feet. The U.K., Spain, France (as of 2014), Italy and Germany (as of 2014) all had less than 5 square feet each.

This clearly illustrates that there is an oversupply of shopping malls in the U.S., which also justifies the increasing rate of mall closures and liquidations. The existence of shopping malls in the U.S. and many parts of the world is now becoming even more questionable going forward as more people shift their shopping activities to online platforms.

According to a report published two years ago by Fortune, more than 300 U.S. malls could cease to exist by the year 2025. About 100 have already closed in the last few years, and this number does not include the liquidation of several store chains across the country.

Therefore, companies are not only closing their stores and liquidating some of their branches to cut costs, but they are also doing so to keep up with emerging trends in the market. Most of these companies that have liquidated store chains have intensified their investment in online retail platforms and shipping services as they seek to stay in touch with the modern consumer.

Conclusion

Share prices of various retail store chains continue to fall as the companies are under pressure from changing consumer behavior coupled with rivalry from industry giants.

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JCPenney, Macy’s, Sears and Kohl’s (KSS, Financial) have been closing several of their stores to cut costs as well as revamp their online retail businesses.

Whether these are deemed to be necessary liquidation of some units of their businesses is subject to debate, but there is a paradigm shift from shopping malls to online shopping, and companies must adapt. This will continue to force several business liquidations in the coming years as competition increases.

Disclosure: I have no position in any stock mentioned in this article.