What can we conclude from the Saks Global bankruptcy? The answer is asymmetrical. Retail disruption, the demise of stores, and industry “carnage” have been predicted for more than a decade. And there are plenty of once-venerable brands left in the wake. Yet department stores such as Mitchell’s, Dillard’s, and Von Maurer, all family-led businesses, continue to significantly outperform peers. A Wall Street highflier collapses predictably and publicly while quieter multi-generation, family-founded and -led versions of the same model remain viable. Why?
Why are family-led and -founded retailers so successful? And the answer is that PE is not the panacea for sustainability.
The Cycle of Death
“The Cycle of Death” is a fundamental operating principle in retail. If a brand loses the ability to make payables, in Sak’s case, from acquirer’s loans, inventory levels and composition deteriorate, investment in physical and digital experience declines, sales fall, and the death cycle accelerates towards bankruptcy. There are ways to stop this cycle. Experience is a prerequisite, and if one has lived through it before (as I have), you know you must urgently take necessary, dramatic action early on. Immediate changes include store closures, liability restructurings, and operational resets. Most leaders act cautiously, clouded by emotion, doing only a little until it’s a little too late.
Wall Street, private, public, and debt capital markets, while the center of capitalism and envy of the world, can craft transactions that help or harm retail businesses. As a bellwether, capital structures can be a harbinger of what is to come. Debt loads, leasebacks, preferred equity with artificial return thresholds and rights, real estate sales, and unnatural cost-cutting can be valuable tools when aligned with strategy. These structures become liabilities, however when applied to satisfy a deal rather than the business needs of customers, partners, managers and owners.
The Art of the Deal
Alignment is critical for any deal to work; debt and equity investors, management teams, owners, customers, and business partners must share end goals. Simply put: Get on the right horse, on the right track, in the right race. It’s clear this can go haywire if you haven’t seen it before. Americans are natural risk takers and typically bounce back after hard lessons learned. The adages, “fail early and often” and “show me success and I’ll show you someone who recently failed,” are truisms for entrepreneurs. Risk-taking, aligning capital, and confidence have made our nation great. In retail, making mistakes can be a key to unlocking the secret of aligning all stakeholders for success with your capital structure.
The Company You Keep
Choosing the right partners is not so obvious. Full disclosure, I have chosen the wrong partners in deals that went sideways. They weren’t bad or stupid people; most of the players lacked experience, and our incentives weren’t aligned. History offers many examples of mismatched partnerships, including Toys “R” Us and KKR and Bain; Hudson Bay and NRDC; Sears and ESL; Federated and Campeau Corporation; Barney’s and Perry Capital, and many others. In all cases, these debt and equity investors are the best in the world. At times they do well, but they crash badly when things are misaligned, and that doesn’t help retail.
PE Misalignment
As private markets have matured and become more efficient, the discipline of the carefully constructed dynamics that drove the leveraged buyout industry have been increasingly overlooked as investors faced pressure to put money to work short-term. Victims include Hudson Bay, Lord and Taylor, Saks, Neiman’s, Red Lobster, Sports Authority, The Limited, and Wet Seat. Retail rarely survives a poorly constructed syndicate of players.
Retail does not seem to demonstrate much experience in aligning the right constituents needed for complex financial transactions. Talk to a great manager, and he or she rarely understands how PE raises the next fund from lenders and secures collateral. Talk with PE, and they rarely understand retail customers, the dynamic retail landscape, or know the business partners who are also focused on the moving retail target (in fact, they’ll often tell you it’s not their job to know).
The Case for Family-Led Retail
Family- and founder-led retailers continue to outperform private equity-funded retail. Some have publicly traded debt and equity. What makes them similar is that each has a shared purpose that aligns management, customers, partners and capital. Their long-term orientation, customer obsession, and aligned incentives all matter. These businesses are not immune to mistakes, but they are structurally better suited to navigate financial complexity.
The retail industry is uniquely demanding: changing consumer behavior, supply chains, multichannel distribution, technology, inventory, pricing strategy, calendar planning, globalization, technology, and on. Yet we have countless examples of business success by family-founded, led or influenced. Massive outperformers include Walmart and the Walton Family, LVMH and the Arnaults, Uniqlo and the Yanai family, Inditex and the Ortegas, Loblaws and the Weston family.
What is their key to success? There are no absolutes, and of course, families get it wrong. But most often, family, founders, and purpose-driven leaders are the glue to get it right. Why? Often, these stakeholders are totally invested. Families or founders have an urgency to stay current, care about the name on the door and brand, and are compelled by the unique combination of ego, drive, and performing better than those who came before. Family business is driven incessantly to stay relevant and work obsessively on all details. It’s not magic. But this passion and attention to detail help align all parties.
Arguably, there is also plenty wrong with families; you see them tearing one another apart over the business. The savvy families bring in a professional manager to manage the complexities.
Back to the Future
I grew up in a family-led business that had to evolve from times when the horse and buggy became an automobile, two World Wars, the Great Depression, the Vietnam and Korean wars, the Cold War, oil shocks, and on and on. We survived history as a publicly traded company. As a cautionary tale, I started a successful chain with the best comp sales in 2008. Then I made a fatal mistake partnering with private equity before I had the necessary experience. A complex business, a new capital structure, and my lack of experience ended up in restructuring. A close colleague never fails to remind me that “humans will not soon walk the earth naked.” Consumption of apparel will remain onstant. That said, how apparel is consumed changes and a brand’s or store’s job is to keep up.
So, restructuring with PE was my fault, and I made the wrong alignment of partners. There is nothing wrong with changing retail or store models. I thought that bringing in investors and utilizing unnatural capital structures would work well. But my lack of experience leading a business within the context of complex capital structures was crucial. My takeaway? Someone who has failed is often better suited for PE than a pedigreed veteran.
Leveraging Disruptive Markets
In today’s marketplace, retail has its challenges, and in today’s landscape, there is a once-in-a-lifetime opportunity. As Nathan Rothschild famously said, “The time to buy is when there is blood in the streets.” Economic opportunity in America is vast and wide. Aligning capital with vision, brand values, customers, managers, and partners, allows for all necessary constituents to come together, perform and win. If you don’t choose the right parties to align with your needs, you risk it all. In simple terms, a bus driver whose agenda is to sell the bus won’t ultimately care about the people riding on the bus who need to get home. That’s what happened with real estate, capital, operators and partners at Saks Global. Unfortunately, customers and partners will pay the ultimate price. From my perspective, in retail, family management is the roadmap to success. The Nordstroms will be a litmus test to watch.
