June was kind to retailers who lure shoppers with the lowest prices, overcoming consumer reluctance to spend in these uncertain economic times. Mega-retailers Wal-Mart and Costco posted solid results last month, with Wal-Mart’s same-store-sales up 5.8% (the biggest jump in years), while Costco posted a 5% gain in comparable sales at its US stores (excluding gas price inflation). It’s probably no coincidence that Wal-Mart and Costco happen to be the nation’s #1 and #3 sellers of groceries, respectively. Indeed, Wal-Mart posted its strongest results in the grocery category. For while consumers are looking for bargains, they seem to be sticking to necessities like food. While Target also sells groceries at nearly 220 SuperTarget stores, the nation’s #2 discount chain isn’t a force in grocery sales. Its same-store-sales (the best indicator of a retailer’s health) increased a modest 0.4%.
But low prices alone can’t stave off disaster. The latest in a growing list of retail casualties (including Linens ‘n Things, Sharper Image, and Whitehall Jewelers, to name just a few recent bankruptcies) is the ultra-low-price apparel chain Steve & Barry’s, best known as the home of the $8 dress and for celebrity-branded clothing from the likes of Sarah Jessica Parker, Venus Williams, and NBA star Stephon Marbury. The 275-door discount apparel seller filed for Chapter 11 bankruptcy protection last week and plans to shutter 100 outlets and may liquidate. In May, the chain was hailed in the business pages of The New York Times for its “obsessive attention to costs,” which allowed it to operate on razor thin margins. Reacting to the company’s fall, analysts blamed “a risky and fragile business model” coupled with more than $500 million in debt. Not a nice place to be in a credit crunch.
The company’s founders Steve and Barry in a statement placed the blame on a hostile business environment that “reduced funding to our suppliers, landlords, and our company.” Indeed, the two said sales have been strong right up to the bankruptcy filing. That may be. Nevertheless, the company is probably toast.
The Darwinian winnowing of the retail industry demonstrates the obvious: A sustainable business model is essential to long-term survival in a fickle industry and volatile economy. But that’s a lesson easily ignored when credit is easy to come by and consumers are charging up a storm.
When the current shakeout in the retail industry is over and the economy begins humming again, it’s a safe bet that the retail landscape will look very different than it did going into the current downturn. But that’s a subject for another post.
Comments
Pat Socorro Says:
July 15th, 2008 at 3:45 pm
It does seem like S&B’s idea to sell clothes so cheap was a risky idea. You don’t have the volume in that type of store (mall locations mainly, right?)that you have at a chain that anchors shopping centers nationally. Wal-Mart, Target, Marshall’s, et al can make selling $8 dresses work because they have other higher-margin items to balance them out. And they don’t usually even design and manufacture them. I also saw something about the company adding 70 or 75 stores per year. That will stress any company. And it seems like it would be difficult to keep a lid on your costs while expanding like that, which is important if op costs are your main source of margin. It does seem odd that this happened so suddenly, however. I just saw an article about the “growing” company in May.
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