• News
• 2024-07-09

US Traditional Retail Struggles: Bankruptcy Wave Threatens Peak Season?

The traditional peak season for consumer spending in the United States is approaching, but for retailers burdened with debt, what lies ahead may be a new challenge.

According to a recent survey by the National Retail Federation (NRF), Halloween spending in the United States this year is expected to decrease by 5%, falling to $11.6 billion.

Among these, the decline in gift card and apparel sales may be the most significant, which is a blow to businesses that rely on this type of seasonal consumption. This year has already been a tough one for the industry as they grapple with increasing administrative costs and a trend of consumers buying cheaper products.

Due to the rising unemployment rate in the United States this year, coupled with high basic inflation rates, families with lower income levels are generally struggling. Michaels, a retailer of arts and crafts, indicated in a recent earnings call that families with incomes below $100,000 are cutting back on spending, leading to fewer items being placed in shopping baskets.

It is also noteworthy that in 2024, several major U.S. retailers faced financial collapse, highlighting the ongoing turmoil in the retail sector. Companies such as Big Lots, a U.S. discount retail chain, and Red Lobster, a well-known seafood chain restaurant, which were once the backbone of the industry, have now joined the ranks of high-profile bankruptcies.

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Roger, a veteran in the California-based U.S. shipping business, told First Financial Daily that according to U.S. customs data from Descartes, a U.S. trade data service provider, the volume of goods in August this year was 5% less than in July, with July's volume being the peak for this year. Looking at historical sequential data, there was a slight increase of 2% in August last year, and a slight decrease of 1% in 2019. "Currently, September looks okay, but it's similar to August and not as high as July," he said.

He explained that although U.S. consumers have generally downgraded their consumption, the need to buy things remains a necessity, and there has been no observed decline in spending due to concerns about an economic recession. At the same time, U.S. retailers are still maintaining a relatively cautious attitude and have not significantly increased their inventory; everyone is still waiting and watching.

The start of the Halloween shopping season

During the pandemic, more consumers than ever before began purchasing Halloween decorations, helping to drive record growth. For example, according to NRF data, from 2019 to 2024, total spending on Halloween decorations increased by 42%, from $2.6 billion to an estimated $3.8 billion.

In the U.S. consumption season, Halloween has become more than just a day; it has become synonymous with the entire fall season. In 2023, Halloween sales reached a record $12.2 billion.Retailers are catering to this craze. Whether it's Starbucks launching pumpkin spice lattes earlier than ever before, or home furnishings chain Crate & Barrel claiming that "Halloween is a full season," retailers are offering extended services that Halloween shoppers want.

Data from the National Retail Federation (NRF) shows that this year, 47% of consumers plan to purchase Halloween costumes, decorations, and more before the start of October; at the same time, young Americans aged 25 to 34 have a particular fondness for Halloween: they spend an average of $124.43 per person on Halloween, which is about $20 more than the average consumer and are more likely to display pumpkins or ghost decorations on their porches early on.

Overall, among all types of consumption, candy remains the most popular, with an expected total expenditure of $3.5 billion; the total expenditure on decorations is expected to reach $3.8 billion, along with costumes ($3.8 billion) and greeting cards ($500 million), where, as last year, the total expenditure on adult costumes is expected to reach $1.8 billion, while the expenditure on children's costumes is expected to be $1.3 billion. As in previous years, interest in pet costumes remains stable, with an expected total of $700 million.

However, as mentioned earlier, overall retailers expect this year's total Halloween sales to decrease by 5% year-on-year. Participants plan to spend an average of $103.63, which is about $4.62 less than the record of $108.24 set last year.

72% of consumers plan to celebrate Halloween this year, among whom, discount stores (37%) remain the preferred choice for purchasing Halloween items, followed by Halloween/costume specialty stores (33%) and online shopping (33%).

Roger told reporters that, from the physical feeling of consumers, there has been no perceived decline in U.S. inflation. Expenditures such as eating out are still astonishingly more expensive than before the pandemic.

An American who recently returned to Washington from Switzerland to visit friends and relatives told reporters that he feels the cost of living in the U.S. is now as expensive as in Switzerland. In the past, earning Swiss francs and spending in the U.S. was stress-free, but now he feels there is little difference.

Affected by factors such as weather and strikes, the latest U.S. inflation and employment data have fluctuated slightly. The preliminary results of the University of Michigan's Consumer Survey show that U.S. consumer confidence has declined so far this month, while expectations for inflation over the next year have risen. Influenced by the rise in prices in some service categories, the September core inflation Consumer Price Index (CPI) and Industrial Product出厂 Price Index (PPI) monthly rates were slightly higher than market expectations.

The U.S. Department of Labor said that for the week ending October 5, the number of initial jobless claims in the U.S. increased by 33,000 to 258,000, the highest level since early August 2023 and the largest single-week increase since July 2021.

Erica Weisgerber, a partner at the law firm Debevoise & Plimpton, said: "2024 has been a perfect storm for all retailers. Inflation, high operating costs, and reduced consumer spending are particularly challenging for brick-and-mortar retailers, while online retailers are struggling in the fierce competition with e-commerce giants like Amazon."It is worth noting that the U.S. retail sales report to be released on October 17th is crucial, as it will reflect the condition of U.S. consumers and the economy.

Bloomberg Economics expects the data to show that retail sales growth will be subdued after catching up in the summer, and manufacturing production will also slow down.

S&P Global Market Intelligence Chief Business Economist Chris Williamson told reporters that the latest consumer price inflation data for September, to be released this Wednesday, will be highly anticipated. At the same time, retail sales and industrial production data will also assess the resilience of the U.S. economy in September.

Roger told reporters that, currently, from the data, U.S. retail sales continue to grow; inventory increases are keeping pace with retail, even slightly slower, indicating that retailers are not blindly replenishing inventory in large quantities. "Overall, they are still waiting and seeing," he told reporters.

The retail industry faces the challenge of restructuring.

Declining performance has brought challenges to the entire U.S. retail industry, with an increasing number of retailers being eliminated, leading to several high-profile bankruptcy cases in the U.S. this year. For example, Joann, a U.S. fabric and craft retailer founded in 1943, has a history of more than 80 years.

In fact, in the retail bankruptcy rating released by risk assessment agency CreditRiskMonitor last year, 11 U.S. retailers were at risk of bankruptcy, including Joann, large home gift retailer Kirkland's, and Big Lots.

Taking Joann as an example, before declaring bankruptcy, the company's total assets were $2.26 billion, and the total debt was $2.44 billion. In March this year, Joann had already filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. As part of the bankruptcy process, Joann obtained $132 million in financing while cutting about $505 million in financing debt.

According to incomplete statistics by First Financial Daily reporters, as of October, the retail giants that filed for bankruptcy in the U.S. in 2024 include Red Lobster, The Body Shop, well-known U.S. wooden toy retailer KidKraft, Joann, U.S. discount retailer "99 Cents Only Stores", well-known U.S. fashion retailer Express, and ten others.

Holly Etlin, a partner in the turnaround business of consulting firm AlixPartners, commented: "Retailers find that they have not done enough to improve efficiency."During the pandemic, many retail businesses that have fallen into operational difficulties are currently owned by private equity funds. For instance, the American home goods retailer At Home, which was announced to be acquired by the private equity firm Hellman & Friedman.

Data from Moody's Ratings shows that home goods, clothing, and hobby retailers dominate the list of distressed retailers because their debt levels imply a lack of liquidity, preventing them from competing with well-capitalized rivals. Moody's said in a report last month that as capital markets shun struggling companies, more retailers turned to bankruptcy rather than distressed debt exchanges over the past year because these companies require more in-depth restructuring, which is best conducted in court. The report indicates that in the three months ending in June of this year, the quarterly filings for bankruptcy protection rose to the highest level since 2012, as part of a larger trend.

Private equity funds generally cannot hedge against the risk of rising borrowing costs, which also means that they are less capable of rescuing distressed businesses. This could have a domino effect on the economy and employment. James Gellert, the Executive Chairman of Rapid Ratings International, a risk analysis provider, said: "Due to the collapse of multiples and the soaring interest rates of leveraged transactions, private equity firms that often support retailers are experiencing a lull in new deals."

Statistical data published by the United States Courts Administrative Office shows that in 2023, the number of bankruptcy filings surged by 16.8%, increasing from 388,000 in the previous year to nearly 453,000 (including both business and non-business bankruptcies). Most of the retail and food industry giants that filed for bankruptcy chose Chapter 11 of the U.S. Bankruptcy Code. Chapter 11 allows companies to reorganize their debts, continue operations, and negotiate deals with creditors while avoiding complete cessation of business. It also gives companies time for significant strategic adjustments, such as downsizing, closing poorly performing stores, or renegotiating leases.