While Indigo’s Entry Into The Troubled American Retail Market Is Bold, It Isn’t Without Significant Risks
Its been rumoured for years but earlier this month Indigo, the largest book retailer in Canada and the third largest in North America, confirmed that it will enter the turbulent American retail landscape. Indigo will open between three to five stores in the U.S. over the next two years, starting with a location in Short Hill, New Jersey.
It’s a pretty bold move to say the least.
America’s retail scene has been so bleak that 2017 was dubbed the year of Retail Apocalypse as early as last February. The signs were beyond troubling even before that. While we all heard about the challenges facing the coal industry during last year’s American Presidential election, America’s retail industry was shedding an average of thirty thousand jobs a month going as far back as October of 2016.
Are These The Waters Indigo Wants To Wade Into?
While the industry will brag that over three thousand new retail stores opened south of the border in 2017, over 6700 were closed and a number of high profile retailers have been forced to either shutter their operations or are in serious distress. Radio Shack, Payless Shoesource, Gymboree, American Apparel and Toys R Us are just a handful of chains that filed for bankruptcy this past year, while retailers like Sears, Gamestop, Macy’s and JC Penny are on the ropes.
America’s retail bubble, thriving since the early 1960’s, is at risk of bursting. Once the hallmark of American consumerism and a signature of its economic vibrancy, the shopping mall is now an endangered species. A new shopping centre hasn’t opened in the U.S. since 2006 while over 1000 shopping centres have closed since the turn of the century. Their rotting corpses are scattered across suburban America like grim reminders of what used to be and dark omens of what’s to come. It’s estimated that as many as 25% of America’s current 1300 shopping centres will shut down over the next few years.
And that’s in a relatively healthy American economy with strong employment.
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We haven’t been immune north of the border either. HMV’s bankruptcy last January came out of the blue and Sears June announcement that they were “restructuring” morphed into September’s decision to completely shutter their Canadian operations altogether (costing over twelve thousand Canadians their jobs). And the next few weeks will determine Toy R Us’ future on both sides of the 49th. If they can’t get approval to restructure their crippling debt by January, the world’s most popular specialty toy retailer could throw the towel in once and for all as well.
Things are actually worse for America’s retail sector now than during the 2009 global financial meltdown and many economists and analysts predict that, as bad as things are, it may be just the beginning.
Indigo’s Advantage
But Indigo does have one serious advantage on its side. While everyone likes to use Amazon as the scapegoat for America’s retail woes, the online retail juggernaut isn’t the largest problem facing the industry. Debt is.
When Tower Records (then North America’s dominant music retailer) saturated urban America and expanded to over 80 markets overseas during the 80’s and 90’s, it financed that massive expansion with borrowed capital. At the turn of the millennium, when sales dropped as a result of online piracy and competition from the likes of Wal-Mart and BestBuy (who sold the same product at deeply discounted prices), Tower was burdened with a staggering debt that stagnant sales and flat growth prevented them from restructuring. Bankruptcy was its only recourse and Tower was forced to close all of its American stores in 2006.
Now every major retailer in the United States faces the same problem.
Sears couldn’t answer the multi-million dollar market call it was facing last summer and sought bankruptcy protection as a result (the now defunct Canadian division was operating under a an estimated 4.9 billion dollars of debt). Toys R US declared bankruptcy in a desperate attempt to refinance 400 million dollars in immediate debt, but Geoffrey the Giraffe actually has a five billion dollar monkey on his back. It’s a story that every major retailer now faces after years of kicking the debt ball as far down the road as they could. But they’ve run out of both road and time and as one economist put it, the entire industry is now facing a dead end.
Over the next five years, it’s believed American retail debt will mature by several billion dollars, crippling companies and preventing them from expanding or investing in new products, services or innovations. Layoffs, store closures and insolvency may be the final answer for many of the companies that find themselves already walking a fine line.
But that much debt has other affects as well. One problem Toys R Us currently faces as it enters the crucial Christmas shopping orgy is supply. Toy companies like Hasbro, Lego, Nintendo and Mattel (who is also in severe financial trouble), who are already likely owed millions by the stumbling toy giant, aren’t jumping up and down at the thought of filling holiday shelves that the retailer may not be able to pay for come January.
So if Indigo can incur little (to no) debt exploring the opportunities south of the border, that will be one hell of an advantage over it’s American cousins. While other retailers are struggling to maintain product selection and financial stress may force them to raise prices, Indigo can play it cool, evaluate the landscape and calmly plan it’s next step while the competition is busy putting out financial fires and struggling to keep its head above water.
But Having Said That . . .
Canadian retailers have never enjoyed much success expanding south of the border. There’s a significant culture difference between the two markets that can prove too challenging for even the best laid plans (just ask Target). One reason Indigo has been able to navigate Canada’s retail waters so successfully is because while Canadians are among the world’s most proficient internet pirates, they have been somewhat slower than their American counterparts to embrace online shopping (so far). It’s a more profound problem for American stores and one that Indigo needs to be prepared for.
And remember when I said Indigo is North America’s third largest specialty book retailer? The other two, Barnes and Noble and Books-A-Million, are American icons already successfully filing the space Indigo hopes to occupy. And neither company is on anyone’s short list to call it quits over the coming years (yet, anyway). How Indigo plans to creates its own unique consumer identity without compromising itself is still unclear.
But all of that may be a moot point. By only opening a few stores over the next two years, Indigo seems content to just dip an exploratory toe in the waters. Indigo found itself on the brink a few years ago but was able to pull itself back with careful and creative thinking. So this isn’t Indigo’s first rodeo, even if it may the be its riskiest. And if it turns out that it doesn’t think there’s a future south of the border, well four or five stores won’t represent a huge loss (when Target terminated its Canadian operations, it shuttered 133 stores in a matter of weeks).
And who knows, perhaps in five years time commercial real estate owners may be throwing themselves at Indigo’s feet, offering them flexible and favourable leases to fill up vacant retail spaces (as a result of so many anchor tenants closing their doors, the commercial real estate market also find itself in dire straits).
But the fact remains that even a handful of stores will face plenty of financial pitfalls so we may be about to find out how agile Indigo really is. But at the very least, Indigo deserves a golf clap or two for being bold.
