Dealing With Bankruptcy: Why Another Retailer Files for Chapter 11

Phillip Hudson, attorney & partner at Saul Ewing Arnstein & Lehr LLP, talked to Commercial Property Executive about the various challenges retailers face in the wake of filing for bankruptcy.
Hudson Phillip, partner at Saul Ewing Arnstein & Lehr LLP
Hudson Phillip, partner at Saul Ewing Arnstein & Lehr LLP

Southeastern Grocers, a supermarket portfolio which operates chains Winn-Dixie and Bi-Lo in Alabama, Florida, Louisiana, Mississippi, North Carolina and South Carolina, recently filed for Chapter 11 bankruptcy. The retailer intends to restructure its debt and deal with certain unprofitable locations, some of which were also affected by Hurricane Irma.

Phillip Hudson, a commercial litigator & partner at Saul Ewing Arnstein & Lehr LLP, has more than 30 years of experience in bankruptcy and insolvency matters. Hudson spoke to Commercial Property Executive about what the future holds for Southeastern Grocers, and he discussed how retailers can navigate the situation created by rising interest rates and falling sales revenues.

Southeastern Grocers recently filed for Chapter 11 bankruptcy. What does this entail for the retailer?

Hudson: The company announced it will likely walk away from 94 stores deemed unprofitable. Our firm has consulted with multiple landlords of shopping centers where some of these troubled stores are located. Not surprisingly, we are starting to see Chapter 11s again, mostly from retailers such as Bon Ton, Charming Charlie and Toys “R” Us. We may well begin to see an increase in Chapter 11s in the grocery space as online retailers like Amazon continue to grow their online grocery delivery services.

How can retailers navigate the “perfect storm” created by rising interest rates and falling sales revenues?

Hudson: It’s not a surprise that the Federal Reserve increased interest rates. If retailers are only considering the consequences of rising interest rates now, they are in trouble. Furthermore, we are at the end of the economic business cycle and if retailers didn’t anticipate falling revenue, coupled with rising interest rates, they will experience tough times over the next couple of years. Retail owners and most business owners need to learn to operate with less debt and find ways to trim expenses until revenues increase.

How will this domino effect impact property valuations and retailers in terms of debt restructuring?

Hudson: Retailers started seeing reduced revenue about two years ago. As a result, we are starting to see brick-and-mortar retailers become more experiential. Static displays no longer attract consumers. Retailers are introducing entertainment and experience opportunities into their stores to enhance the shopping experience. Lucky’s Market, a specialty grocery store chain focused on natural, organic and locally-grown products, is one example of this new trend. Consumers can order a beer at the bar in the store and carry it around while they shop.

Retailers such as Southeastern grocers are shedding their unprofitable stores much like retailers did in the late 1980s, when rents were rising at an alarming rate. This time around it’s not the expense side but the revenue side that is the driver for restructuring. While this round of restructuring will make retailers more profitable, it will negatively impact the valuation of shopping malls and centers.

For example, an anchor tenant like Winn-Dixie may account for 40 percent of the revenue in a shopping center. Once that revenue is compromised, the value of the shopping center decreases. If a landlord cannot replace the big box store—which is not so easy—it may need to repurpose the space incurring substantial capital and lost rent during the build-out period. In the long term, a new generation of tenants able to thrive in the era of e-commerce will emerge. But for the short term, landlords will definitely experience pain.

Does this case bare any resemblance to the recent Toys ”R” Us situation? 

Hudson: Southeastern Grocers bankruptcy doesn’t bare any resemblance to the recent Toys “R” Us situation, because it hasn’t been materially impacted by online sales. Toys “R” Us is a classic case of the negative impact to brick-and-mortar created by internet shopping, making some retailers the last horse and buggy on the street. It is a missed opportunity for the toy store because it could have made the shopping experience more experiential for kids given its unique niche market, as well as capitalizing on online sales. I think we may see Toys “R” Us again. If someone has the vision, they will acquire the brand and apply a more progressive retail model going forward.

Image courtesy of Saul Ewing Arnstein & Lehr LLP