Canadian retailers are facing mounting financial pressure as higher operating costs, cautious consumer spending and excess inventory squeeze cash flow, according to distressed-asset recovery expert Alex Hennick.
Hennick, president and CEO of A.D. Hennick and Associates, said the current wave of retail distress is being driven by a combination of economic pressures rather than a single event, with legacy retailers carrying high fixed costs particularly vulnerable to insolvency and restructuring.
Hennick, an expert in distressed asset recovery, liquidation strategy and retail survival planning, said there is a lot of pressure beneath the surface right now, and we’re seeing certain industries and categories struggle more than others.
Consumers more selective
“Consumers are still spending, but they’re being much more selective about where their money goes. That puts added pressure on retailers to discount more heavily and work harder for every sale,” he said.
“What feels different about this period is that there isn’t one single event driving the distress. Retailers have had to deal with the lasting effects of COVID, supply chain disruptions, wars, tariffs, higher interest rates and years of economic uncertainty, all while the cost of doing business continues to rise.
“Rent, wages, fuel, transportation and manufacturing costs are all higher, while in many cases retail traffic appears to be lower than it was years ago.
That creates a very difficult environment. Retailers are being asked to absorb higher costs while competing for a consumer who has more choices and is increasingly focused on value. A business can operate under that pressure for quite some time, but eventually it starts to catch up, particularly when sales soften and more cash becomes tied up in inventory, payroll and long-term warehouse and retail leases.”
Hennick said iInventory is often one of the clearest early warning signs a retailer is heading toward insolvency or bankruptcy.
“You start to see product building up, deeper and more frequent markdowns, reduced or cancelled purchase orders, overcrowded warehouses and a growing urgency to turn inventory back into cash,” he explained.
“You may also see businesses stretching payments, asking suppliers for longer terms, closing underperforming locations or trying to renegotiate or exit leases.
Waiting too long to act
“The biggest issue is that companies often wait too long to act. There can be a reluctance to take a loss on inventory, close a store or acknowledge that certain products or parts of the business are no longer working. By the time the problem becomes impossible to ignore, many of the best options may already be gone, leaving management with far less flexibility and fewer ways to stabilize the business.”
Legacy retailers can be especially vulnerable because many are carrying significant fixed costs, including large store networks, long-term leases, substantial payroll and older systems built for a very different retail environment, said Hennick.
“At the same time, consumers have become much more value-conscious. They’re comparing prices, waiting for promotions, buying directly from overseas marketplaces and being more selective about discretionary spending. That makes it increasingly difficult for retailers to pass higher costs on to the customer,” he said.
“Legacy retailers that haven’t adapted and built a strong e-commerce business alongside their physical stores are at an even greater disadvantage. When you combine higher rent, wages, transportation, borrowing and product costs with softer store traffic and less flexibility to adapt quickly, it creates enormous pressure on businesses that were built for a very different way of shopping.”
When a retailer is in financial distress, the most important thing is to act early, while there are still options available, added Hennick.
“That can mean reducing purchases, converting excess inventory into cash, closing or renegotiating underperforming stores or warehouse space, working with landlords and suppliers, selling non-core assets, refinancing debt or bringing in new capital or strategic partners,” he said.
“Some companies view selling assets or excess inventory as admitting defeat, when in reality it can be a very effective way to improve liquidity and create breathing room before the situation becomes more serious.
“If those steps aren’t enough, a formal restructuring may provide an opportunity to reorganize the business rather than simply shutting it down. The earlier management recognizes the problem, the more options it has and the better chance it has to preserve value.”
One of the biggest lessons Canadian retailers should take from the recent wave of bankruptcies and restructurings is that inventory management is really cash-flow management, noted Hennick.
Importance of cash-flow management
“Inventory may look like an asset on a balance sheet, but if it isn’t selling, it is tying up cash while continuing to create storage, handling and other carrying costs, Retailers also need to be realistic about what inventory is actually worth in the market, not simply what they paid for it. In many cases, once inventory becomes slow-moving, dated, seasonal or distressed, it may be worth far less than its original cost. The longer it sits, the fewer options a company may have and the more value that inventory can ultimately lose,” he said.
“Another major lesson is that retailers need to start forecasting in real time. Brands, products, trends and consumer spending habits can all change very quickly, so businesses can no longer rely too heavily on what happened in the past. They need to understand what is happening in the market today and be prepared to react quickly, rather than assuming that what sold last year will continue to sell this year.
“That means constantly reviewing sales data, inventory levels, consumer behaviour, market changes, and being prepared to adjust purchasing, pricing and product mix quickly. The companies that recognize those shifts early have far more flexibility than those that react only after inventory has built up and too much cash has already become tied up.”
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