Michael Dickenson CEO of Ironbridge Software stated, “Isaac Larian, CEO of MGA Entertainment is trying to save Toys R Us by turning the stores into destinations. He plans to include attractions such as play areas. Whether he succeeds or not, he is on the right track. Retailers who counter the e-commerce onslaught successfully such ULTA and Sephora are doing just that: making their store destinations.”

Last year was rough on retailers (The Limited, HHGregg and Radioshack were just a few examples of stores that filed for Chapter 11) and 2018 isn’t shaping up to look much better. Toys “R” Us was just the latest retail giant to go under and we discussed it in last month’s blog post. In April, The Bon-Ton Stores, Inc., the retailer that owns Carson’s and Boston Store among other nameplates, announced that it would be closing all 256 locations later this year. The company has been operating in the U.S. since 1854. What happened? And why now?

Massive debt cripples once-thriving retailers
Media outlets, consumers and retailers alike are quick to blame closings on the rise of ecommerce (i.e. Amazon) and shifts in consumer habits driven by millennials. According to Forbes.com “Data compiled by Bloomberg suggests that while those factors are contributing to retail’s contraction, a ballooning load of hard-to-refinance debt held by retailers will doom more chains in the coming years than anything else.”

The real culprit behind the struggling state of retail is the leveraged buyout (LBO). According to Business Insider: “Nearly every retail chain caught up in the brick & mortar meltdown is an LBO queen – acquired in a leveraged buyout by a private equity firm either during the LBO boom before the Financial Crisis or in the years of ultra-cheap money following it.”

Toys “R” Us is a prime example of an LBO that saddled the retailer with so much debt it was unable to make a profit. According to CNN Money, the toy retailer had taken on billions of dollars in debt. “That debt stopped it from making the necessary investment in stores. And that meant an unpleasant shopping experience that doomed the chain,” Writes Chris Isidore in an article for CNN Money.

How does Amazon fit into the picture?
While Amazon can’t take all the credit for toppling once-dominant brick-and-mortar retailers, the e-commerce giant has sure sped up the process. As we’ve discussed in our e-commerce series, millennials have shifted consumer habits to favor online shopping. But this fact alone can’t account for Amazon’s rapid success.

“Just the way Amazon does business–they’re so innovative,” says Sherry Smoak, assistant professor in Elmhurst College’s business department and director of the D.K. Hardin Center for Market Research. “They’re willing to push the envelope and ok with not making money or being profitable,” Smoak adds. That’s the perspective innovators take, she says, adding, “That differentiates them from traditional retailers who are used to a more formulaic approach and keeping things the same.”

So while traditional retailers floundered under leveraged buyouts and failed to reinvest in their stores and customers, Amazon was forging a relationship with online shoppers. The company first wowed online shoppers by pioneering algorithms that suggested purchases based on buying history. Then they reorganized their warehouses and logistics to offer free 2-day shipping on most purchases. This model has influenced shoppers to the point of raising delivery time expectations across all of e-commerce.

Some estimates put the cost of free Amazon Prime shipping at $1 billion per year. This isn’t profitable for Amazon, but the fact that Prime members spend, on average, more than twice as much as non-members is. Amazon’s innovative model allows the company to lose money on shipping in order to boost sales and loyalty. This is a key example of the way Amazon stays nimble while traditional retailers stay entrenched in an old business model that isn’t cut out for the twenty-first century.

Are you a retailer or manufacturer looking to run a lean operation by using your own data? Ironbridge Software can help. We build custom solutions to track inventory, sales, demographics and everything in between. Drop us a line today and see how Ironbridge Software can help your business thrive.

Written by Kim Kelly Consulting