At The Deal's M&A Outlook 2009 conference Tuesday morning, John D. Howard, CEO of Irving Place Capital, spoke about the future of the retail business during his keynote address.
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Howard said that there is a definite lack of consumer
confidence due to the liquidity and credit stop at banks and this has
trickled down, putting retailers into panic mode. "When mall traffic
stops, then stores mark down their inventory.
If you go to Saks, then you see the whole store is on sale. It becomes
a self-fulfilling prophesy. Because of all of the markdowns due to a
lack of consumer confidence, this will be a horrendous Christmas
season," he said. "There is no
liquidity, and how you unsieze things has to start at the top and it
trickles down."
Howard expects that after the end of the year
banks will start lending capital again. "There is so much capital
waiting on the sidelines that I
think once it changes it will change quickly. We are in a
brushfire, and we have to wait until it burns itself. At the same time,
if you are in retail and you have just gone through this season, you
have to consider how you plan to recover from this season. It's going
to be challenging," he said.
Howard believes the retail business must change in order to recover.
"Our industry has grown through extravagant leverage. I have lived in
this environment, and the more
leverage made available, the more they take. There is a lack of
discipline in companies, and they are borrowing too
much," he said.
Going forward Howard believes that consumers will be interested in more
modest
consumption. "There is a lot of trading down phenomena that is going
to
occur. If you usually shop for Gucci, you might go out and get regular
mall shoes. If you can identify these chains that will fit the
consumer's needs, then it is a good investment opportunity," he
explained.
Howard explained that retail is
about real estate. But the value in selling the real estate isn't the
sole reason you would invest in a retail business; it's about an evolving business. "Mall owners have a
strong hand in consumer
spending, and most of the retail companies that own real estate have
been bought and resold several times. Look at Macy's. How would you
determine the price of Herald Square? Still, the retail business is
changing. There
is a whole new generation of people
who are shopping online, and that is growing. Companies have to be
involved in e-commerce to get ahead," Howard said. -
Maria Woehr
See all M&A Outlook 2009 posts
