Berk's Blog

Retailers Now Face A Darwinian Fight For Survival

Posted By

If the crowds on the highway on the way home from work are any proof, retailers are fighting for their lives with unbelievable sales. Ever since the U.S. Congress started pressuring China to de-link its currency peg to the US dollar, we predicted that there was tremendous overcapacity in US retail. With everything from homes, cars and electronics piling up in the supply chain and on retailers shelves, only the strong will survive. And the ones that survive will have increased their Return on Invested Capital and the length of time that those returns are to exceed their cost of capitals.

Retailers Now Face A Darwinian Fight For Survival as losses mount.

U.S. retailers will face a Darwinian fight for survival next year as they run out of cash as early as January and competition forces thousands of store closings, according to private-equity buyers and restructuring experts.

Probably 50,000 stores could close without any effect on consumer choice, Gregory Segall, a managing partner at buyout firm Versa Capital Management Inc., said yesterday during a panel discussion held at Bloomberg LP’s New York offices.

“The United States is massively over-stored in all categories,” Segall said. He said his firm is in “a wait mode” and he expects banks to squeeze retailers after Jan. 1.

Plunging home prices, rising unemployment and tightening credit have led consumers to rein in spending, resulting in what may be the worst holiday season in at least four decades. Macy’s Inc., Kohl’s Corp. and other retailers have marked down items 50 percent to lure customers, eroding margins at a time when store owners hope to make a third or more of their annual profit.

Only retailers with healthy balance sheets will survive the recession, said Matthew Katz, a managing director at consulting firm AlixPartners LLP.

“This is a very Darwinian time,” Katz said.