4 Reasons Why Neiman Marcus Had a Fall From Grace & Filed for Bankruptcy

Photo of a Neiman Marcus store
 

By Tricia McKinnon

Storied luxury department store Neiman Marcus has struggled over the past decade to stay relevant. Consumers are still buying luxury goods they have just changed where they buy them from. Instead of going to your local Neiman Marcus or Saks Fifth Avenue store consumers often buy luxury goods directly from the brands themselves bypassing department stores altogether. Or perhaps you want to shop from a wider selection of luxury brands and Net-a-Porter is your first stop. These are just some of the changes in luxury shopping that have taken place over the past decade that Neiman Marcus has been slow to react to. 

If you are curious about why the century old retailer has had a fall from grace then consider these four factors that led Neiman Marcus to file for bankruptcy in May of 2020.

1. Growing online competition

For close to one hundred years Neiman Marcus, which was founded in 1907, was one of few places where you could shop for a wide variety of designer goods in a single location. But with the introduction of many online luxury marketplaces in the early 2000s that began to change. Spurred on by the success of Amazon which launched in 1994 Net-a-Porter launched in 2000, Mytheresa launched in 2006, and Farfetch launched in 2007. 

These shopping sites gave consumers access to thousands of luxury brands with a click of a button. Consumers no longer needed to go to a Neiman Marcus store to buy a designer purse, they could easily find one online. These sites were aggressive in their attempts to lure shoppers online while initially many luxury brands shunned eCommerce believing a high-end and high-touch experience could not be replicated online. If a consumer wants to a $10,000 coat surely they want tailored in-person customer service. But times have changed.

With more options consumers became less loyal to department stores like Neiman Marcus while enjoying the ability to shop from whomever they wanted when they wanted to. Like many retailers at that time Neiman Marcus did not see online competitors as a threat. Toys “R” Us, which at one point was the largest toy retailer in the United States, also failed to see how the industry was changing. In 2000 Toys “R” Us signed a 10-year agreement to be the exclusive supplier of toys for Amazon. As part of the deal, www.toysrus.com redirected to www.amazon.com. By 2002 Amazon became the top online destination for toys. While locked up in this contract with Amazon Toys “R” Us did not feel the need to develop its own eCommerce capabilities, something it would later regret. 

By the time Neiman Marcus realized the potential of online shopping it was too late as many of these upstarts had already grown into valuable businesses. By 2015 Farfetch was valued at $1 billion and now it is valued at $14 billion. In 2014 Neiman Marcus, realizing it needed more exposure to the growing online market bought MyTheresa for $200 million and now MyTheresa is valued at $3 billion.

Online shopping essentially had the effect of more than doubling Neiman Marcus’ competition. Before it only had to contend with the likes of Saks Fifth Avenue, Barney’s New York, Nordstrom and Bloomingdales. "What the internet has brought to price transparency has impacted how the customer thinks about shopping and where she wants to shop," said former Neiman Marcus CEO Karen Katz. "She wants to make sure she is getting the right price for the product that she desires." “More and more, we’re seeing our customers shop multiple stores and web sites, not just ours,” said Katz. 

The real test of a retailer is not how they do when they have limited competition but how they do in face of larger competitive threats. Walmart for instance has risen to the occasion as Amazon tries to eat its lunch. Walmart has invested heavily in eCommerce and specifically in curbside pickup, something Amazon can’t emulate, at least not for now. Walmart’s eCommerce sales were up 6% in the second quarter of 2021 and they grew by 97% in the same period last year. Neiman Marcus on the other hand was unable to adapt fast enough to changes in the market. 

2. The decline of department stores

One of the main reasons department stores rose in popularity is because they offer one-stop shopping. On a busy Saturday afternoon a mom with two kids could load everyone in a car and spend a couple of hours at a local Sears or Saks Fifth Avenue and within a few hours she would have everything she needs. With most consumers complaining of being time starved department stores served an important role. There simply aren’t enough hours in the day to get everything done. But with the advent of online shopping the need to spend a day shopping at a large Neiman Marcus store diminished over time.

Even if you want to go shopping in-store you can complete a shopping trip much faster now than in the past. That negates the need for enormous stores like the 188,000 sq. ft Neiman Marcus store that was located at Hudson Yards in New York City. With store inventory just a click away most consumers no longer have the patience to spend a full afternoon browsing in person when they have already done their homework online. But many department store retailers including Neiman Marcus have been slow to accept this reality. Developers spent at least $80 million to build the Neiman Marcus store at Hudson Yards. The store opened in 2019 and was only in operation for one year. It closed last September as part of Neiman Marcus’ bankruptcy proceedings. 

If you were starting from scratch would you build a department store that is nearly 200,000 sq. ft? No, you wouldn’t. Amazon, which is starting from scratch, is reportedly planning to open department stores that are 30,000 sq. ft. Amazon may have less categories but it recognizes the best path forward is to only offer a limited selection of top selling items. The larger the store, the higher the real estate costs, the higher the inventory burden and the higher the staffing costs. Many of these stores simply aren’t economical. Retailers like Walmart and Target still have large stores but they lure customers in with groceries, a category most consumers still like to buy in person. Then customers stick around to buy what they need. 

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3. The proliferation of brands selling direct to consumer

A trend that has been in place for some time is brands opening up their own stores and bolstering their own eCommerce capabilities. Why should a brand sell wholesale when it can sell directly to its customers. One of the strategic moves Nike made to provide more direct connections with customers was to rationalize its wholesale business. In 2017 Nike sold its product through an estimated 30,000 retailers but by 2019 it only had 40 strategic retail partners. To make this shift Nike exited several wholesale relationships including the ones it had with Zappos, Belk, and Fred Meyers.

Luxury retailers are investing more in their own channels. Gucci and Prada now generate 85% and 90% respectively of sales from their own channels. This move is great for brands but it puts department stores like Neiman Marcus at risk. Brands are the livelihoods of department stores and without them there is no compelling reason to shop there. “Why would I go to Neiman Marcus when I can actually go to the brand store, which is more compelling and easier than going to a department store,” said Neil Saunders Managing Director at GlobalData Retail.

It’s harder now to find Gucci merchandise at Neiman Marcus. “That Saks has all that [Gucci] merchandise and Neiman’s doesn’t is an indication of [a] falling out,” said a top industry  source. Normally both luxury retailers carry the same inventory from the brand. There is also a lack of Louis Vuitton inventory at Neiman Marcus. “The biggest complaint from the stores is lack of merchandise,” said one Neiman Marcus employee. “We simply don’t have the stock we used to have.”  “From the store point of view there is concern about Louis Vuitton. The inventory is there but not as much as before. Or the selection has shrunk and there are fewer choices than in the past.” “I feel like I’m in a catch-22.” “We must reach out to customers [but] then [we] find out we don’t have the stock either in store or in our warehouse,” said another employee.

4. High debt levels

Private equity has played a key role in Neiman Marcus’ woes. In 2005 private equity firms TPG and Warbug Pincus bought Neiman Marcus for $5.1 billion. Neiman Marcus’ debt levels increased by 1,000% after the transaction. Then in 2013 Neiman Marcus was sold to private equity firms CPPIB and Ares Management for $6.2 billion leaving Neiman Marcus with $4.8 billion in debt. Private equity firms like these companies typically use large sums of money to buy a company, turn them private, turnaround the business only to sell it later at a profit. That’s what happens if all goes well. In some cases as is the case with Dollarama and Canada Goose private equity ownership has resulted in positive outcomes. But in many cases like Neiman Marcus the outcome is less than desirable. 

Retail is often a good private equity candidate because of the stable cash flows retailers generate and their lucrative real estate portfolios. In the past decade private equity companies and hedge funds have made controlling interest investments in more than 80 major retailers. “Retail used to be kind of a golden goose for private equity firms, because in order for an LBO (leveraged buyout)  to work, the company has to be fairly mature with fairly regular cash flows,” says Elisabeth de Fontenay, a Duke University School of Law Professor specializing in Corporate Finance. “Under normal conditions, that’s kind of the definition of retail.”  It “works out just fine as long as the economy and sector you’re invested in continues to grow.” “If the sector is shrinking, it has been bad news.”

Perhaps the biggest issue with private equity is the enormous debt burden it places not on the private equity firm but on the retailer itself. To facilitate a buyout private equity firms raise debt, billions of it at times. That debt then falls on the balance sheet not of the private equity firm but on the balance sheet of the retailer. The retailer is then liable to pay the debt back. 

Source: The Dallas News

Source: The Dallas News

That debt also results in large interest payments which between 2013 and 2018 amounted to $1.2 billion for Neiman Marcus. That’s money that could be deployed for better uses such as investments in eCommerce technology or in store labour. Before entering bankruptcy proceedings, Neiman Marcus had debt levels of nearly $5 billion. “A lot of brands are hanging on by a thread, and Neiman was one of them,” said Milton Pedraza, Chief Executive of the Luxury Institute, a retail consultancy in New York. “It had so much debt — from being bought and sold, and bought and sold — that really hampered its ability to invest and innovate.”

By the time Neiman Marcus entered bankruptcy proceedings in May of 2020 it was on the hook for more than $300 million in annual interest payments making it challenging to generate a profit. “The debt burden ultimately proved insurmountable, particularly given near term operating challenges related to the coronavirus pandemic,” said David Silverman a Fitch retail analyst. 

At the beginning of the COVID-19 pandemic Neiman March was one of the first retailers to file for bankruptcy. While the pandemic may have finally tipped the scales against Neiman Marcus its bankruptcy was a long time in the making. Even before COVID-19 hit Neiman Marcus was struggling, with a loss of $31.2 million and $19.9 million in 2019 and 2018 respectively. Going back even further it’s easy to see that Neiman Marcus lost its hold on the luxury industry years ago.

Photo of Neiman Marcus’ same store sales: 2015-2017

Last September Neiman Marcus emerged from bankruptcy. During bankruptcy proceedings it eliminated $4 billion in debt and $200 million in annual interest payments. “The bankruptcy process did help reduce the company’s debt load -- but there’s still a lot more to play out in terms of where the luxury apparel space is headed,” said Mike Campellone, an analyst with Bloomberg Intelligence.

Tricia McKinnonStrategy & GrowthComment