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Barbara Farfan

Chapter 11 Bankruptcy: A Retail Strategy for All?

By August 21, 2008

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Mrs. Fields revealed that the cookie is crumbling when it announced its plans to file Chapter 11 bankruptcy last week. After suffering a $10.7 million loss last quarter, the privately-held purveyor for mall-shopping sweet teeth is seeking court protection while it decides what to do with its $200 million in accumulated debt.

If the executives at Mrs. Fields were to attend a support group of this year’s most prestigious retail companies in Chapter 11, they would be commiserating with their peers from Boscov’s, Mervyn’s, Shoe Pavilion, Linens ‘N Things, Sharper Image, Goody’s, Wickes, Lillian Vernon, and Dan River. Under any other circumstances, joining this club of well-known retail brands would be considered an honor. Unfortunately, though, the qualifications for 2008 membership are declining revenues, loss of market share, and crippling debt.

Companies that seek Chapter 11 protection are down, but they’re not yet ready to count themselves out of the retail game. Using history as a benchmark, independent long-term survival beyond Chapter 11 is not likely. But retailers like Federated Stores (Macy’s), Southland (7-11), and Winn Dixie, along with notables from other industries like Continental Airlines have proven that it’s not impossible. If Chapter 11 is a “reorganization” period, then life after Chapter 11 seems to be dependent upon how much of the organization is actually reorganized.

Most companies in Chapter 11 seem to focus on financial concerns. Since restructuring debt, though, doesn’t restructure the leadership, strategies, policies, and operational practices that created the debt, the organizations that continue to do the same things in the same ways after Chapter 11 don’t get better results, and soon find themselves on the brink of bankruptcy again.

Federated Stores fundamentally changed its merchandising and buying strategies, and the efficiencies allowed it to compete with discount apparel competitors. Winn Dixie fundamentally changed its IT and operating systems and the savings from its streamlined operations drove post-bankrutptcy sales and profits. Southland fundamentally changed its image with physical remodeling and a huge philosophical shift from “insult pricing” to “everyday fair pricing.” Continental fundamentally changed its policies and corporate culture to become an employee-driven customer-centric organization which now enjoys the highest customer loyalty in the airline industry.

Core changes at a fundamental level are the foundation upon which successful Chapter 11 survivors have built a new and improved version of themselves. They used their time in Chapter 11 as a meaningful and lasting reorganization period, and because of that, they still exist as a thriving business today.

So why don’t flailing companies use a pre-emptive “reorganization” strategy before bankruptcy becomes the unavoidable option? Oil magnate J. Paul Getty may have known the answer when he said, “In times of rapid change, experience could be your worst enemy.” Since reorganization requires those who created the current reality to question that reality, and more painfully, to question themselves, most choose to defend their current course until they’ve run out of road and the business is teetering on the brink of disaster.

If retail leaders want to learn from the Chapter 11 lessons of others, they can adopt a proactive periodic core reorganization strategy as a way to keep on a course of continuous improvement. If you wait until Chapter 11 forces you to reorganize, there may not be much more to your story.

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