This week, Forever21 and Fairway filed for bankruptcy. It's somewhat surprising given the relative, broad strength in the economy which includes record-low unemployment, low-interest rates, decades-high wage growth, record-levels of consumer confidence, all-time highs in retail spending, and stock markets at all-time highs.
These relatively high-profile bankruptcies with positive economic and financial conditions reflect that there is a considerable amount of churn in the retail industry due to competition and changes in consumer tastes and behavior. While retail has always been a tough industry, most companies could count on higher foot traffic due to population growth. However this has changed as foot traffic has plateaued and declined in many cases due to Amazon (Nasdaq: AMZN) and online shopping which can offer unlimited variety, lower prices, and fast delivery.
Fairway Bankruptcy
In cities like New York City, Amazon's grocery deliveries are often same-day delivery which makes it much more convenient than lugging bags of groceries across many streets and avenues. This dynamic is surely affecting Fairway, a New York City-based grocery chain that specializes in large collections of premium items like wine, cheese, and seafood. It actually has filed for bankruptcy twice in the past 4 years, meaning that it's already emerged from Chapter 11 bankruptcy which it just had to re-file.
Retailer bankruptcies have been spiking in the past few years due to the aforementioned trends. Some commonalities in these companies are that they have too many stores or have expensive leases, increased competition, declining foot traffic, weak online presence, and onerous debt loads. In addition to Amazon Fresh, Fairway faces increased competition from Trader Joe's and Whole Foods.
Forever21
Apparel is even more competitive than retail given that its more susceptible to fads. Forever21 was a successful operator due to its "fast fashion" concept and affordable prices. Its success led to quickly opening over 800 stores. When Forever21 lost appeal among its targeted demographic, it found itself unable to meet its obligations.
Already, 100 of these locations have been shuttered. The rest of the company will be sold to a consortium of Simon Property Group (NYSE: SPG), Brookfield Property Partners (NYSE: BPY), and Authentic Brands. Essentially, these companies are Forever21's landlords and their motive is to prevent excessive empty retail space which would negatively impact the values of their assets. In 2016, there was a similar move by mall operators to rescue Aeropostale to prevent more than 200 empty locations.
Like Fairway, Forever21 failed in efforts to gain traction online. It also lost market share to other "fast fashion" competitors and dealt with every retailer's challenge of declining foot traffic. These negative trends coupled with the company's rapid expansion led to its demise.