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Published:November 7th, 2008 15:12 EST
The Ripple Effect: How One Bankruptcy Causes Another

The Ripple Effect: How One Bankruptcy Causes Another

By Joel G. Block (Mentor/Columnist)

It`s well known that many of the large national retailers in the United States are coming under fire. Traffic is down, consumer spending is reduced, and several of these large national retailers have recently filed for bankruptcy. Some of the bankruptcies have been reorganizations or chapter 11. Others are chapter seven, which means a complete sell off of all of the company`s assets in order to pay money to the people that it owes.

There are some little known issues about these bankruptcies and how it effects the thousands of small businesses that sell to these companies. It affects the large companies as well, but not nearly with the same amount of impact as it affects the small ones.

When one of these giant companies place an order with a small business, that order is frequently so large in proportion to the small business that`s providing the services or products, that it represents a dramatic percentage of all of the sales made by that company (the small business) during the entire year.

When one company represents a large percentage of a company`s activity, that`s called concentration. Concentration for a small business is very dangerous, and banks usually steer away from lending to companies that have concentration. But here`s why concentration is such a bad thing: as much as the business owner and the staff are happy to be working on giant projects when they get orders from companies such as Mervyn`s, Linens and Things or Shoe Pavilion, those giant orders can become that company`s downfall.

Here`s why. When a company like Mervyn`s files for bankruptcy, they stop paying their vendors. If Mervyn`s is the largest company or customer that you have, then all of the sudden your future revenue stream is shut off. But worse, the largest customer is probably going to leave the company holding the proverbial "bag" " without much to pay salaries, bills and the vendors for that small business.

If Mervyn`s represents just a small percentage " say under 20% of all of your revenue " it hurts, but it doesn`t put you out of business. But when Mervyn`s stops paying their bills, the manufacturer " who isn`t paid " can no longer pay his bills. So the suppliers to the manufacturer are left unpaid. That`s called a ripple effect. So, when Mervyn`s goes out of business, it`s not isolated for Mervyn`s. The ripple effect brings down thousands of small businesses.

Now, it might be possible for the manufacturer to recognize that they have a concentrated position, but it gets more complicated because the manufacturer of the goods is buying from another manufacturer in many cases. That supplier usually has no idea about the level of concentration his customer has, and therefore, when the Mervyns situation occurs, and the dominos begin to fall, thousands of companies can be impacted.
One last point: If you borrow money or if you factor your invoices, and the factor advances you more than they have agreed to in your contract, they may begin to grab at your receivables when difficulties arise because they are concerned about taking care of their loans. That means that the borrower is going to be put in an increasingly complicated situation.

Also, many factors lose money when companies like Mervyn`s go out of business and are therefore unable to pay the invoices they purchased. If the factor goes out of business and they`ve advanced you 80%, you (the borrower) are going to lose the remaining 20%.

One of the ways that companies like factors protect against large company disasters such as Mervyn`s (or United Airlines and K-Mart from a few years ago) is to purchase credit insurance. One of the best credit insurance guys in California is my good friend Howard Kaye. His company, Coface North America, produces a regular digest on the biggest companies and who to stay away from. Use the information below from their most current report as you see fit. (*)

After you read the Coface update, take a guess as to where the next big crash will be. How about the commercial real estate market?

By the way, what finally throws a giant company into bankruptcy? It happens when the credit insurance companies stop issuing credit insurance and when the factors stop factoring invoices for the suppliers. Then the money stops moving and when the money stops moving, the game is over.

So, all the way around, when a giant company like Mervyn`s goes out of business, the impact is felt everywhere. It affects the manufacturers that supply Mervyn`s; it affects the suppliers of the manufacturers and so forth. It even affects the financial providers that supply the money to the manufacturers and the upstream suppliers, and so on down the line. The problem is bigger than many people realize.

So, as you are working hard every day to build your company, or as you`re building your career, be smart about who your customers are. Ask if they have concentrated positions that could injure you or otherwise damage you. Be careful about the quality of the financial partners that you take on, and make sure that they have the wherewithal to withstand the storm that`s coming and is hitting us now. Study industry reports such as the one below, because as companies go out of business, there`s no doubt that there`s going to be a lot of collateral damage.

About Joel G. Block, President of Growth-Logic, Inc.
Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenue and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker, advisor and faculty member of the iLearningGlobal community. To bring Joel into your company, please visit http://www.joelblock.com  or http://www.growth-logic.com.  Also, be sure to check out our newest project: a blog to organize the blogs that cover entrepreneurship - http://www.entrepreneur-hub.com. And finally, for film makers: http://www.filmfundingblog.com  - our newest project.

(*)  Information Provided by Coface North America on Thursday November 6, 2008

STORE CLOSINGS AND LAYOFFS:

1) Ann Taylor closing 117 stores nationwide
A company spokeswoman said the company hasn`t revealed which stores will be shuttered. It will let the stores that will close this fiscal year, know over the next month.

2) Eddie Bauer to close more stores
Eddie Bauer has already closed 27 shops in the first quarter and plans to close up to two more outlet stores by the end of the year.

3) Cache closing stores
Women`s retailer Cache announced that it is closing 20 to 23 stores this year.

4) Lane Bryant, Fashion Bug, Catherine`s closing 150 stores nationwide
The owner of retailers Lane Bryant , Fashion Bug , Catherine`s Plus Sizes will close about 150 under performing stores this year. The company hasn`t provided a list of specific store closures and can`t say when it will offer that info, spokeswoman Brooke Perry said today.

5) Talbots, J. Jill closing stores
About a month ago, Talbots announced that it will be shuttering all 78 of its kids and men`s stores. Now the company says it will close another 22 under performing stores. The 22 stores will be a mix of Talbots women`s and J. Jill, another chain it owns. The closures will occur this fiscal year, according to a company press release.

6) Gap Inc. closing 85 stores
In addition to its namesake chain, Gap also owns Old Navy and Banana Republic. The company said the closures - all planned for fiscal 2008 - will be weighted toward the Gap brand.

7) Foot Locker to close 140 stores
In the company press release and during its conference call with analysts today, it did not specify where the future store closures - all planned in fiscal 2008 - will be. The company could not be immediately reached for comment.

8. Wickes is going out of business
Wickes Furniture is going out of business and closing all of its stores. Wickes, a 37-year-old retailer that targets middle-income customers, filed for bankruptcy protection last month.

9) Goodbye Levitz / BOMBAY - closed already
This furniture retailer is going out of business. Levitz first announced it was going out of business and closing all 76 of its stores in December. The retailer dates back to 1910 when Richard Levitz opened his first furniture store in Lebanon, PA. In the 1960s, the warehouse/showroom concept brought Levitz to the forefront of the furniture industry. The local Levitz closures will follow the shutdown of Bombay.

10) Zales, Piercing Pagoda closing stores
The owner of Zales and Piercing Pagoda previously said it plans to close 82 stores by July 31. Today, it announced that it is closing another 23 under performing stores. The company said it`s not providing a list of specific store closures. Of the 105 locations planned for closure, 50 are kiosks and 55 are stores.

11) Disney Store owner has the right to close 98 stores
The Walt Disney Company announced it acquired about 220 Disney Stores from subsidiaries of The Children`s Place Retail Stores. The exact number of stores acquired will depend on negotiations with landlords. Those subsidiaries of Children`s Place filed for bankruptcy protection in late March. Walt Disney in the news release said it has also obtained the right to close about 98 Disney Stores in the U.S. The press release didn`t list which stores.

12) Home Depot
Nearly 7+ months after its chief executive said there were no plans to cut the number of its core retail stores, The Home Depot Inc. announced Thursday that it is shuttering 15 of them amid a slumping U.S. economy and housing market. The move will affect 1,300 employees. It is the first time the world`s largest home improvement store chain has ever closed a flagship store for performance reasons. Its shares rose almost 5 percent. The Atlanta-based company said the under performing U.S. stores being closed represent less than 1 percent of its existing stores. They will be shuttered within the next two months.

13) CompUSA (CLOSED) clarifies details on store closings
Any extended warranties purchased for products through CompUSA will be honored by a third-party provider, Assurant Solutions. Gift cards, rain checks, and rebates purchased prior to December 12 can be redeemed at any time during the final sale. For those who have a gadget currently in for service with CompUSA, the repair will be completed and the gadget will be returned to owners.

14) Macy`s - 9 stores

15) Movie Gallery - 160 stores as part of reorganization plan to exit bankruptcy. The video rental company plans to close 400 of 3,500 Movie Gallery and Hollywood Video stores in addition to the 520 locations the video rental chain closed last fall.

16) Pacific Sunwear - 153 Demo stores

17) Pep Boys - 33 stores

18) Sprint Nextel - 125 retail locations
New Sprint Nextel CEO Dan Hesse appears to have inherited a company bleeding subscribers by the thousands, and will now officially be dropping the ax on 4,000 employees and 125 retail locations. Amid the loss of 639,000 postpaid customers in the fourth quarter, Sprint will be cutting a total of 6.7% of its work force (following the 5,000 layoffs last year) and 8% of company-owned brick-and-mortar stores, while remaining mute on other rumors that it will consolidate its headquarters in Kansas. Sprint Nextel shares are down $2.89, or nearly 25%, at the time of this writing.

19) J. C. Penney, Lowe`s and Office Depot are scaling back.

20) Ethan Allen Interiors
The company announced plans to close 12 of 300+ stores in an effort to cut costs.

21) Wilsons the Leather Experts - Liquidating 158 stores

22) Pacific Sunwear will close its 154 Demo stores after a review of strategic alternatives for the urban-apparel brand. Seventy-four under performing Demo stores closed last May.

23) Sharper Image
The company recently filed for bankruptcy protection and announced that 90 of its 184 stores are closing. The retailer will still operate 94 stores to pay off debts, but 90 of these stores have performed poorly and also may close.

24) Bombay Company
The company unveiled plans to close all 384 U.S.-based Bombay Company stores. The company`s online storefront has discontinued operations. (Freehold Mall store closed)

25) KB Toys posted a list of 356 stores that it is closing around the United States as part of its bankruptcy reorganization. To see the list of store closings, go to the KB Toys Information web site, and click on Press Information.

26) Dillard`s to Close More Stores
Dillard`s Inc. said it will continue to focus on closing under performing stores, reducing expenses and improving its merchandise in 2008. At the company`s annual shareholder meeting, CEO William Dillard II said the company will close another six under performing stores this year.

27) MERVYNS - GONE

28) LINENS AND THINGS - GONE

29) Shoe Pavilion - GONE

30) Circuit City - uninsurable and on its way out.