Why do so many big box stores seem to follow the huge growth -> saturation -> quick implosion and bankruptcy script?
Surely their margins don't materially change? Low per store sales from bad stores? But the first step seems to be closing stores, and that doesn't resolve the issue. It seems weird they'd be able to attract capital for expansion, but then implode so quickly.
Debt financing.
Zigging a bit, my family has been watching The Foods that Built America: https://www.history.com/shows/the-food-that-built-america It seems that about half the episodes tell the same story: Somebody built a new food concept, or polished an existing one in some very useful economic way. They're super ambitious and pretty much as soon as they proved out their base restaurant or sold to a few stores, they immediately opened a couple dozen new restaurants or built a huge new factory. Which they do by loading up on huge, huge amounts of debt. Most of the rest of the human interest portion of the episode talks about the stresses of pulling in enough money to pay the debt. Many of them get acquired or end up getting so much external investment that it amounts to an acquisition.
Of course it's a survivor bias situation; we're not getting told stories about the companies that did the same thing but failed utterly.
While the past 20 years of ~zero interest rates have made this even easier, it isn't necessary. It has quite often been possible to go to some banks with what looks like a good idea and end up in debt up to your eyeballs while expanding your business size possibly by entire factors of magnitude virtually overnight. It ends up very similar to the venture capital pattern we're familiar with in our industry even if isn't exactly the same forces. The result is basically a bimodal distribution; either you manage to pay down the debt to some reasonable level and you end up with a large money-printing business, or you don't, and you have to liquidate everything.
Basically you're seeing the failing side of the bimodal distribution of this pattern. Since a business always works to project strength, you never see them visibly ailing; it's just, there's this big edifice that looks invincible and then virtually overnight it's gone.
A further elaboration relevant to BB&B is that when you're in debt trouble, you become extremely vulnerable financially. You need to pay off that debt, and that opens you up to corporate raiders who supply you with enough to keep you afloat, but then have a lot of options to do things useful in the short term but that kill the company in the long term. With clever structuring, they can keep the profits but dump the debt with the company itself as it goes under. BB&B had some of this going on. However, I consider this a further consequence of the original debt financing, basically one of the concrete ways it can fail.
(Expect to see some more over the next few years. There's a lot of "zombie companies" out there (a term you can google), which is a term for the companies making just enough revenue to pay the interest load on their debts but not pay down principle. In a zero-interest rate world they could sort of chug along indefinitely, but as they have to pay real interest you're going to see these companies really start to struggle.)
I've always wondered the degree to which these buyouts are legitimate last-ditch turnaround efforts vs front-running bankruptcy proceedings.
Hum, kinda, but infinite-growth management doesn't get a bimodal distribution. They get a corporate version of the Peter principle, where the loans increase in value until the company can't grow enough to pay them.
You don't even get a distribution in final outcomes, just in lifetime. And since the growth is exponential, there isn't a lot of variance on it either.
AIUI, it's common when taking on debt for the creditors to try to protect their investment by including specific performance guarantees. There may be numbers that the company has to maintain around revenue, inventory turnover, etc. - or the creditors will have the right to call the debt.
The thing is, the need for the creditors to limit their risk isn't necessarily aligned with the overall best interest of the company. Conforming to these debt covenants can force the borrower to act for short-term numbers at the expense of long-term performance, a sort of Goodhart's Law effect caused by the metrics imposed in the debt covenants.
I've seen my employer become the beneficiary of this through a couple of periods of tough markets. Privately held with zero debt, our CEO was able to solidify our market position at the same time our competitors were doing obviously dumb things, the result of which is that we came out of those difficult times very much stronger in the industry.
I'd be curious about typical financing terms in retail for physical expansion.
But time at a few solid, well-run companies made me appreciate how important a powerful but ego-less CFO is to success. Someone in the room to say "Doing that will cost a lot in the future. What about this alternative?"
I'd also be curious about the frequency of successful debt management schemes... it seems something of a prisoner's dilemma if you're a large shareholder in a heavily-indebted business.
Either you allow the company to plow revenue into paying down debt (maybe for years), or you preempt your fellow investors and launch a raid to extract value for yourself before it implodes.
It seems like making companies more resistant against raid-and-dump-debt would be good for all involved (companies, their creditors, the entire pool of equity holders... basically everyone except raiders).
That's why capitalism is so great, right? Creative destruction.
Recently--mostly private equity.
Any company with >$50 million in real cashflow is a target for private equity to come in, load it up with debt and extract the cash.