Bankruptcy Is in Fashion

According to business analysts, the global fashion and luxury goods industry continues to grow both in terms of goods and in terms of money. At the same time, data from The Business of Fashion shows that fashion companies are going bankrupt at an unprecedented rate. In most cases, bankruptcy is initiated by companies that follow the traditional offline sales model (through boutiques, stores, or department stores) in the mid-range price segment.

USA

Among the main reasons for financial failures, analysts highlight the inability to withstand competition from fast-fashion companies and the outflow of customers from shopping malls (the latter are increasingly preferring to shop online). Conservative retail is unable to adapt its business models to the growing demands of modern customers and the new challenges they create. This year, the well-known American company BCBG MAX AZRIA GROUP, which specializes in the design and production of cocktail and evening dresses, filed for bankruptcy under Chapter 11 of the U.S. Code, which regulates the most common bankruptcy procedure in America — the reorganization of insolvent companies under the leadership of the old management in an attempt to avoid complete liquidation.

In order to initiate this procedure, the debtor company must file a relevant application with the court and then develop a reorganization and debt restructuring plan that will allow it to stay afloat. At the same time, the management of the debtor company and its assets is carried out by the current management, but under the supervision of the creditor committee and the court. As the main measures, the reorganization plan of BCBG MAX AZRIA GROUP, for which it received additional financing of USD 45 million, involves the possible sale of the company, the closure of about 120 retail stores, as well as the consolidation of the company's operations in Europe and Japan.

Recent high-profile bankruptcies in America include the bankruptcy of the California online retailer Nasty Gal and the bankruptcy of American Apparel. The former was sold at auction for $20 million to the British retailer Boohoo.com, which may give the Nasty Gal brand another chance. The second company went to the Canadian clothing manufacturer Gildan Activewear, which won the auction to acquire the production facilities and intellectual property previously owned by American Apparel for US$88 million in cash, beating off the bids of Forever 21 and Amazon.

United Kingdom

European retail is also facing similar challenges. The news that one of the oldest British retail giants, British Home Stores (BHS), has been unable to overcome financial difficulties has been a major shock to the fashion industry. The company was sold to the Al Mana Group as an unprofitable asset for 1 pound, and it currently operates only as a limited online retailer. According to British analysts, approximately 44% of British retailers are currently on the verge of bankruptcy. In particular, in the spring of 2017, the British company Jaeger announced its dire financial situation. The beloved brand of the Duchess of Cambridge, Kate Middleton, was unable to keep up with its competitors (such as Burberry) and withstand the pressure from mass-market retailers (Zara, H&M), leading to the appointment of an administrator. Over the past few years, Agent Provocateur, Banana Republic, Peacocks, and other companies have also applied for administrator appointments.

Under UK insolvency law, an administrator is appointed by court order (administration order) to manage the affairs of a company with the aim of preserving it, approving a voluntary agreement on debt restructuring with creditors or selling its property and other assets at a price more advantageous than in liquidation. The main duties of the administrator include exercising control over all the company's property; preparing proposals aimed at achieving the goals set out in the appointment order; convening meetings of creditors to discuss these proposals with them; and subsequently implementing the agreements reached within the framework of direct management of the company.

Skilful administration and timely business decisions can indeed save a company from actual bankruptcy, as was the case with the Warehouse brand, which updated its board of directors, creative director, and customer relations director by appointing the former digital director of the British mass market brand TopShop to these positions. The new management's strategy, brand philosophy, and pricing policies helped the company celebrate its 40th anniversary in 2016.

As the history of global fashion shows, such well-known brands as Tommy Hilfiger, Escada, Gianfranco Ferré, Christian Lacroix, and Yohji Yamamoto have faced financial problems at various times, but successful management decisions have helped these companies survive bankruptcy proceedings, maintain their businesses, or transition to a new stage of development.

Russia

The domestic fashion industry market, which has already been significantly depleted since 2014, has also been affected by a series of bankruptcies. The last year was marked by the final stage of bankruptcy proceedings against Kira Plastinina Style LLC, which owned the Lublu Kira Plastinina and Kira Plastinina brands. According to the documents submitted by the temporary manager, it is not possible to restore the financial and economic activities, as the balance sheet value of the debtor's property and assets does not allow for settlements with creditors, whose total claims amounted to approximately 2 billion rubles. The bulk of the debt consists of non-payments under lease agreements.

The Kira Plastinina brand has been actively developing in the Russian market since 2007. At its peak, the chain had 279 Kira Plastinina stores in seven countries and 56 boutiques of the premium line of the Lublu Kira Plastinina brand in 16 countries. However, in 2016, the retailer decided to reduce the total number of stores in Russia by almost three times due to a sharp increase in costs caused by the ruble devaluation.

The large shoe retailer Carlo Pazolini, which had a well-developed network of stores (more than 200) not only in Russia but also in Italy, the United States, the Czech Republic, Ukraine, Moldova, and the Baltic countries, was also in a difficult situation. As the exchange rate increased, it became impractical to invest in international projects, and the management decided to close the American stores and reduce the number of European stores. The need to reduce the number of sales points also arose in Russia. Since August 2016, Alfa-Bank JSC has been applying for a supervision procedure against Anta CJSC, which owns the rights to the Carlo Pazolini trademarks. According to the case materials, the company's debt to the bank, including penalties, amounts to approximately 850 million rubles. In addition, Alfa-Bank JSC filed a claim for the joint recovery of debts under two credit agreements dated 2012, amounting to $11 million and 8.4 million euros, from three foreign entities of the retailer: Carlo Pazolini Trade limited, Carlo Pazolini Participation LLP, and Carlo Pazolini (Switzerland) S.A. A bankruptcy procedure for an individual was also initiated against the company's founder, I.A. Reznik, at the request of ATB Bank LLC, with a claim amount of 660.3 million rubles.

An analysis of both domestic and foreign bankruptcies in the fashion retail market has revealed a specific trend: the affected companies are mostly classic representatives of the offline sales model. The development of a large network of retail outlets is no longer a priority, and often fails to cover the costs associated with its expansion. Consequently, those companies that ignore modern trends in the fashion industry, which are formed with a clear emphasis on digitalization, are most exposed to financial risks.