I don’t know how many of you saw yesterday’s article in the Times (see Retailing Chains Caught in a Wave of Bankruptcies). Although the story is not new, there were some interesting nuggets in the article. Michael Barbaro explains:

The surging cost of necessities has led to a national belt-tightening among consumers. Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable.

Retailing is a business with big ups and downs during the year, and retailers rely heavily on borrowed money to finance their purchases of merchandise and even to meet payrolls during slow periods. Yet the nation’s banks, struggling with the growing mortgage crisis, have started to balk at extending new loans, effectively cutting up the retail industry’s collective credit cards.

“You have the makings of a wave of significant bankruptcies,” said Al Koch, who helped bring Kmart out of bankruptcy in 2003 as the company’s interim chief financial officer and works at a corporate turnaround firm called AlixPartners.

“For years, no deal was too ugly to finance,” he said. “But now, nobody will throw money at these companies.”

This is consistent with what I’ve been saying for a long time now, that businesses are getting hit especially hard on both the supply side and demand side of the ledger at once. This makes for a very difficult environment.

But the retail story is just a warm up.

Moving forward, the real action will be in how these effects reverberate throughout our economy, and then spillover to the broader world economy. Outside of housing and financial firms (the epicenter of this crisis), the next obvious lurch downward, which we’ve already begun to see, is in durables (autos, appliances, etc.); retail; and travel. In essence the recession is now beginning to impact those businesses closest to the struggling consumer. From there, just follow the supply chain upstream to the manufacturers of intermediate goods and providers of intermediate services. And as it so happens, many of those providers of intermediate goods and services are foreign. 

And this is how a U.S. recession effectively turns into a worldwide recession.

In my opinion, the world is just too interconnected, and the U.S. such a large part of the world economy, for it not to happen.

Just one question: Have we hit the first intermission in this show yet?

This entry was posted on Wednesday, April 16th, 2008 at 4:48 pm and is filed under Bankruptcies, Corporate Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.