Retail relief

This year presents opportunity for private equity firms to help rebuild the retail sector, and score big returns for LPs in the process, writes Sun Capital's Scott King.

There are two ways to look at 2009. 

On one hand, it was an extraordinarily tough year for retailers hit by the worst recession in decades leading to many businesses filing for bankruptcy. On the other hand, 2009 was a year for retailers to reground themselves, recharge batteries, and focus on the fundamentals as they struggled through the year –  that is, to aggressively cut costs, focus on improving their offerings, enhance execution at store level and streamline operations. As a result, today many retail businesses are leaner and essentially better positioned and will be quicker to market.

Scott King

That said, a lot of work remains to be done at retail level and we believe that 2010 will be an attractive year from the perspective of private equity investors. Consumer confidence obviously hasn’t swung back yet, we are still in a recession, and retail businesses continue to struggle with reinventing themselves and getting their performance back on track. 

For some retailers, the trouble with performance is not cyclical but about fundamental economics that don’t work, and thus they are fighting an uphill battle. Generally, what we find is that management of struggling retailers are in need of a fresh set of eyes to evaluate their core business and provide a roadmap.  

Often times, private equity firms are in a better position than strategics to do so. Why? Because they bring a broader base view and experience to the retail world, a strong operational skill set and a different sense of urgency to driving results as they hold companies for a limited time, generally between 5-7 years. So that’s where we see private equity’s greatest vantage point this year and a real opportunity to help retailers get back on their feet in 2010. 

Generally speaking, strategic acquirers will fold a retailer into their operations and will make them act and look just like the parent company, while private equity firms bring a fresh perspective to their business along with clearly defined expectations. They will take on the role of a strategic partner and coach, and will help them become more mature businesses.

In 2010, as the economy continues to recover, retailers will be hard pressed to differentiate themselves in a global competitive marketplace. In retail, it’s all about execution – to have the product when the consumer wants it. It’s about clean, orderly stores and effective marketing, highly motivated store associates, having the right cost structure, and buying the product at the right price. That’s something they will continue to struggle with in 2010. Private equity is good at showing management how to create value, implementing strict benchmarks around performance and taking a more rigorous approach to monitoring a business’s financial performance. 

So there are truly many timely opportunities for private equity this year to play a constructive role in rebuilding the retail sector and to generate solid returns for investors. We expect to see fewer bankruptcies this year, and the IPO market is starting to open up for more established retailers. Overall, our view on the retail sector is that of the “glass being half full” – that’s a view from an opportunistic turnaround investor.

Scott King is a senior managing director at Sun Capital Partners.