Page 85 - Accelerating out of the Great Recession

ACCELERATING OUT OF THE GREAT RECESSION

tions. Over the last few quarters, in fact, we have begun to see
a rise in corporate default rates. The default rate among specu-
lative-grade companies has jumped from 2.4 percent in the sec-
ond quarter of 2008 to 11.5 percent in August 2009. Moody’s
Investors Service, the ratings agency, expects the rate to peak at
13 percent over the next few quarters.
Arcandor, the German retail group that recently filed for
bankruptcy, provides a good example. The retailer had been
struggling for a decade and nearly went bankrupt in 2004.
Arcandor’s business model had remained virtually unchanged
despite fundamental shifts that had occurred in the market in
which it operated. Its long-standing slogan—“Everything
under one roof”—had worked well in the absence of large-scale
specialty and discount retailers. However, the strategy failed to
be effective as shoppers moved toward specialist stores selling
expensive goods on Main Street and discounters with lower
costs offering goods at rock-bottom prices. The Great
Recession proved to be the final nail in the coffin. Saddled with
high rents negotiated during the boom, the company also had
to contend with collapsing revenues.
An unfocused product strategy has plagued many other
companies during the Great Recession, including Woolworths
in the United Kingdom, the general retailer that filed for bank-
ruptcy in 2009. In the United States, Eddie Bauer also filed for
bankruptcy in 2009. The company, which was a victim of high
debt levels—having let its debt be syndicated, traded, and
owned by very aggressive hedge funds—suffered because con-
sumers stayed away from its large-footprint mall stores and
because the retail promotional crossfire to woo back customers
drained the company’s margins. Now, after restructuring,
Eddie Bauer is back in business.

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