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Bankrupt Brown & Cole Blames Wal-Mart

Jim Prevor’s Perishable Pundit, November 14, 2006

When on November 8, 2006, Brown & Cole LLC filed for Chapter 11 bankruptcy proceedings, the company blamed three factors:

First, in 1999 Associated Grocers, which owns a minority stake in Brown & Cole LLC, stopped paying dividends. Brown & Cole had been receiving $2 million a year up to that point.

Second, healthcare costs nearly doubled over a two to three year period.

Third, and most interestingly, Brown & Cole issued a statement that said this:

The tipping point came with Wal-Mart’s saturation of markets in Washington, causing Brown & Cole to close four large stores in the Tri-Cities and Arlington areas. Even though the stores are closed, the company has continued to pay rent on the facilities and has been unable to find replacement tenants. The inability to shed lease expense on closed stores has put an additional burden on the company’s finances.

“We pay wages that are 50 percent higher than Wal-Mart and make health care payments on 95% of our workers, more than double Wal-Mart’s commitment. It’s hard to remain profitable competing with a low-wage, non-union operator like that, but fixing our financial problems on the backs of our employees was never an option that we were willing to pursue,” Brown & Cole Stores President Craig Cole said. “Our sales and customer growth over the last six months have been strong, and most of our 27 stores are profitable. We have to keep our prices down in order to remain competitive, so our overall cost structure, especially with high lease expense on closed stores, needs reworking.”

Cole said that competing with Wal-Mart for customers is very doable, except when it over-stores a market. He asserted that Wal-Mart’s long-term strategy has been to oversaturate markets with surplus retail capacity so that smaller companies will be driven out of the market.

“Wal-Mart’s pattern is to flood a market with supply of too much retail space in relation to demand. That is happening all over the country, and the small and regional operators are typically the fallout, leaving mostly global and national operators in the market,” Cole said.

Wal-Mart has expanded rapidly into Washington over the past few years, in places such as Marysville, Omak, Tri-Cities, Yakima, Sunnyside and Moses Lake. It now boasts 44 stores in the state and has announced plans for several more.

Leases on closed stores are a classic reason for entering bankruptcy. Though the laws have changed recently, these leases can either be rejected or settled. A vibrant, profitable operating company that is burdened by leases for discontinued operations can almost always be successfully reorganized.

Beyond that point, though, it is hard to make much of these claims.

We have a lot of trouble understanding what it means to say that “…competing with Wal-Mart for customers is very doable, except when it over-stores a market. He asserted that Wal-Mart’s long-term strategy has been to oversaturate markets with surplus retail capacity so that smaller companies will be driven out of the market.”

Obviously, if Wal-Mart, or any other competitor, limited its new store openings to those towns that were growing so fast that there was a genuine need for more retail space, then, yes, they would not “over-store” a town. But assuming that in most of the country nobody is starving due to a shortage of food retailing square footage, then every time anyone opens a new store — be it additional supermarkets, warehouse clubs or supercenters — the town will become “over-stored.”

Then what happens is consumers reshuffle their shopping, electing to choose those shopping venues they like best for all kinds of reasons — location, price, service, assortment, etc.

The venues unable to sustain themselves close up and, typically, become furniture stores or get subdivided into smaller stores or become ethnic markets or some other usage. This brings the square footage of food retailing space down and a new equilibrium is formed.

But this dynamic has nothing to do, particularly, with Wal-Mart. If a town can support only one conventional supermarket and a competitor opens a second supermarket across the street, the new competitor will have over-stored the market until one guy goes out or the market grows or the concepts change.

Basically this seems to be accusing Wal-Mart of having the audacity to think that, ultimately, consumers will value its offer enough to shop its stores. Remember Wal-Mart could open 100 stores and if nobody shopped at them, the “over-storing” would only be a problem for Wal-Mart.

The release goes on to say: “We pay wages that are 50 percent higher than Wal-Mart and make health care payments on 95% of our workers, more than double Wal-Mart’s commitment. It’s hard to remain profitable competing with a low-wage, non-union operator like that…”

This is sort of odd because it implies that the higher wages they claim to pay are a form of charity. Typically, when a company pays higher wages, they realize some benefit from doing so.For example, they may have less turnover. If so, then Wal-Mart’s seemingly cheaper wage may be no bargain because a higher percentage of its employee time is spent in training.

Or better wages may result in better long term retention, so Brown & Cole may have highly experienced employees, expert at doing their job, and Wal-Mart may have rank novices who mess everything up. Or perhaps the higher wages just attract higher IQ employees who are better problem-solvers and improvisers. Whatever the case, this argument is basically that the employees are burdens as opposed to an asset to the organization.

Yet the weirdest argument of all is this sort of grandiloquent statement: “…fixing our financial problems on the backs of our employees was never an option that we were willing to pursue.”

This is a chain that has already closed four stores out of 31 and announced that it expects to close four additional stores out of the remaining 27. So this is a chain that will have closed 8 out of 31 stores or over 25% of all its stores. And that is if everything works out as planned. It could get much worse.

This means that the people working in the closed stores get paid a lot less than they get paid at Wal-Mart. They get fired and are paid nothing.

Before they get so self-righteous about not “…fixing our financial problems on the backs of our employees…” maybe they should have asked the employees if they would rather have a lower paying job as opposed to no job at all?

One wonders if this isn’t all a smokescreen. The stores just weren’t doing enough business to make them viable.

You can read the whole press release here.

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