COVID-19

Distressed retailers play “hot potato” with landlords and suppliers

Marielle Segarra May 28, 2020
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A "closed" sign on the Victoria's Secret shop in Herald Square. Eduardo Munoz Alvarez/Getty Images
COVID-19

Distressed retailers play “hot potato” with landlords and suppliers

Marielle Segarra May 28, 2020
Heard on:
A "closed" sign on the Victoria's Secret shop in Herald Square. Eduardo Munoz Alvarez/Getty Images
HTML EMBED:
COPY

Victoria’s Secret filed a lawsuit this week asking a judge to let it break the lease on its store in Herald Square in Manhattan because of the pandemic.

Also, J.Crew has gotten court approval to defer its rent payments, as did Pier 1.

The whole thing is starting to feel a bit like a game of hot potato, with each company trying to pass the pain on to somebody else.

Hot potato — you know the game, right? The potato’s hot, nobody wants it and it goes round and round the circle.

Basically overnight, American consumers stopped buying clothes and shoes and lots of other things, and big retail chains do not want to be holding that potato. So they pass it along, for instance, to their landlords.

“I would call it more throwing the potato as hard as they can at landlords,” said Joel Bines, managing director at AlixPartners. “Essentially, the retailers have said, we’re just simply not paying rent and we’ll figure it all out later.”

Landlords might win legal battles with the retailers eventually and get their rent money. But in the meantime, they have to pay their mortgages. They can try to toss the spud to their banks and see what happens.

The next potato? Retailers are passing it to their suppliers.

“Just extending the analogy way farther than it was designed to be extended, it’s more like retailers cutting up the potato and handing pieces of the cut-up hot potato to various suppliers in various amounts,” Bines said.

In practice, that means canceling orders and delaying payment. “So yes, I want the product, but instead of paying you in 30 days or 60 days, I’m going to pay you in 120 days,” said Craig Rowley, senior client partner for retail consulting at Korn Ferry.

The retailers have a lot of power here, so vendors will try to hang in there and meanwhile, pass the tater even further if possible. 

“The vendors then go to their suppliers or the people who provide them fabric, materials and the like, and push back on them to say, again, the same way we just had orders canceled, so now we’re going to cancel your orders,” Rowley said.

Finally, there is the debt potato (yeah, we’re still doing this).

A lot of retailers have racked up billions of dollars in debt over the past decade. Now, they’re filing for bankruptcy and getting rid of it. In other words, passing the potato yet again.

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