UAB Expert Commentary: Retail in Recession: Companies at Risk and Ripple Effects

In addition to the recently announced bankruptcies and closures of retail chains Linens N’ Things, Circuit City and Mervyn’s, a report from Forbes.com out this week listed clothing retailers Lane Bryant, Eddie Bauer, Pacific Sunwear and jewelry distributor Zales as companies facing potential bankruptcies in early 2009.

January 28, 2009

BIRMINGHAM, Ala. - In addition to the recently announced bankruptcies and closures of retail chains Linens N' Things, Circuit City and Mervyn's, a report from Forbes.com out this week listed clothing retailers Lane Bryant, Eddie Bauer, Pacific Sunwear and jewelry distributor Zales as companies facing potential bankruptcies in early 2009. The Forbes predictions could be the tip of the iceberg as retailers that cater to middle income households could falter in great numbers this year, according to UAB Assistant Professor of Marketing Lauren Skinner, Ph.D.

"Job loses have cut deeply into the middle-income bracket since the fall of 2008, and Americans have changed their spending habits," Skinner said. "Stores that cater to the middle class by offering daily indulgence type purchases, like the latest pair of hiking boots or in-style sweater, are therefore more at risk.

"The deep discount retailers are the ones seeing increased business as a result, and luxury retailers also will not suffer as badly because their target group, higher income customers, is not as deeply affected by the economic downturn," Skinner said.

A growing number of retail bankruptcies and resulting store closures will likely ripple through the industry, affecting otherwise solvent stores and companies, Skinner said.

"Most of these early 2009 bankruptcies have affected retailers that are not stand alone or destination stores," Skinner said. "These are shops and stores in retail centers, which rely on the ability of the symbiotic relationship of their individual retailers to draw in customers.

"If one store closes and customers for that store's type of merchandise stop coming to the retail center, now other stores with a similar target audience begin suffering from the lack of foot traffic," Skinner said.

Adding to the ripple effect is the credit crunch, which is making it tougher for upstart companies and even proven retailers to raise the capital needed to open new shops in the store fronts vacated by bankrupted or failing retailers, Skinner said.

"It will be very difficult to recruit people into the vacant spaces, and without new stores to draw in new customers, customer traffic will continue to slow, which will further damage the stores that remain open," Skinner said.

Skinner said recovered financial stability in middle class America is the best remedy for recession battered retailers, but with stability forecasted to be months away, it could be a long spring and summer for retailers.