The pressures from high rent and on-line competition that drove retailers Sports Authority Inc. and Golfsmith International Holdings Inc. into bankruptcy in 2016 won't ease in 2017 and may spread to businesses such as wholesalers and real estate companies, threatening corporations like Costco Wholesale Corp. (COST) and the already-affected DirectBuy Inc., bankruptcy experts said.
Traditional brick-and-mortar retailers have been struggling to keep up with rising rents and wages as well as a changing consumer, who is increasingly choosing to shop online.
In 2017 and beyond, New Jersey attorney Stuart Komrower of Cole Schotz PC said he predicts "big box retail discounters" are the next "on the firing line."
Wholesalers such as Costco and DirectBuy are profitable in a strong buying economy but may start to lose their purchasing power, the amount of goods that can be bought for a certain amount of money, Komrower said.
A key indicator of purchasing power is inflation. If the rate of inflation is high, it is harder for wholesalers to purchase products in bulk for a cheap cost. The inflation rate on U.S. consumer prices increased slightly to 1.6% in October from 1.5% in September, according to the U.S. Bureau of Labor Statistics.
If wholesalers keep losing purchasing power, Komrower said they will eventually have to downsize and "maybe, most importantly, develop a complimentary brand that is sold online."
Operator of members-only online buying clubs DirectBuy has already been affected. The company filed for Chapter 11 on Nov. 1 to attempt to restructure about $154 million in senior secured debt. DirectBuy did not cite in court papers what led it to accrue its debt.
Connecticut attorney Joshua W. Cohen of Day Pitney LLP said he expects the effect of retailer Chapter 11 filings to "trickle down" to real estate in upcoming years.
"It will be difficult to re-purpose brick-and-mortar retailers (that shutter)," Cohen said. "The guys who will come out ahead are the folks who are the most creative in re-purposing their real estate holdings."
Cohen also said he is questioning what effect a president-elect Donald Trump administration will have on bankruptcy petitions.
He said, if economists are right in predicting that Trump's plan to scrap certain trade deals like the Trans-Pacific Partnership will lead to recession, "we might see a rise in filings whether that be in 2017, 2018, 2019, depending on how long it takes for the impact to take effect."
"This is going to be an evolving story," Cohen said. "There's a lot we don't know about what's going to happen."
For the third fiscal period ended Oct. 15, there were 18 companies, with $25 million or more in assets, that filed for Chapter 11 protection in the category labeled consumer, education and retail, according to The Deal's bankruptcy database.
Well-known retailers such as sporting goods maker Sports Authority Inc. was forced to shut down operations and close its stores in April after attempting to reorganize its business through a Chapter 11 process. On Sept. 14, specialty golf retailer Golfsmith International Holdings Inc. filed for Chapter 11, blaming the consumer's shift away from shopping at brick-and-mortar stores to online.
"The sporting goods industry in general is suffering," Tiger Capital Group Executive Managing Director Bob DeAngelis said at a recent Association of Insolvency and Restructuring Advisors (AIRA) conference.
DeAngelis said sporting goods retailers are particularly "taking a big hit" on the "apparel side," and the reason certain of these companies have succumbed to bankruptcy is because they lack a strong e-commerce platform.
"(Sports Authority) had a name with great brand recognition," DeAngelis said, but the company did not generate enough revenue online.