Slide Rules and Hula Hoops – Business Obsolescence and Bankruptcy

One of the functions that bankruptcy proceedings can serve is to encourage entrepreneurship by allowing people to pursue bold innovations while still allowing them to recover if their new ideas don’t prove successful. Another equally important function is to provide a structure for restructuring or liquidation of businesses that have become obsolete. There are several ways in which a business can become distressed by obsolescence. The slide rule business was left in the dust as technology developed and the slide rule was permanently replaced by more advanced devices. Similarly, typewriters have all but disappeared following the development of computers and keyboards.

Recent distress in the oil sector and earlier difficulties in the steel industry have been the result of economic strains caused by temporary rather than permanent market displacements. In addition, economic trends, changing fashion and fads can also imperil the viability of a business. The hula hoop was not really replaced; rather, it was a fad that simply faded away. Buggy whips, telegrams, slide rules, typewriters, and cassette tape players are all examples of business segments that resulted in bankruptcy filings because of the march of technology.

But whatever the cause, bankruptcy provides a reorganization opportunity or a structured ending for businesses caught by changing times or changing fashion. As we look ahead into 2017, what are the businesses confronting the prospect of potential obsolescence?

Retail

One segment that continues to suffer from evolving technology as well as changing trends and changing fashions is the “bricks and mortar” retail business. Years ago, virtually every significant city had one or more large, downtown department stores. Those have now all but disappeared, replaced by suburban malls that developed in response to changing consumer practices. Now those malls are, in turn, becoming obsolete as consumers increasingly turn to online purchases.

For general merchandise stores, the problem is compounded by the potential to lose sales as more nimble competitors can react more quickly to changing fashion trends. And even specialty retailers can be left behind as consumer tastes rapidly shift. One need only take note of the continual changes in the tenants at commercial areas as new stores open and close in response to changing demands.

So looking ahead, it is safe to expect that upheavals will continue in the retail sector. Online shopping will continue to build, with the corresponding pressure on those businesses that have substantial investments in physical outlets. And changing consumer preferences will add to the challenge of remaining responsive to the market.

Healthcare

Another field that will likely continue to be challenged is healthcare. We have been reading almost daily about changes in the healthcare markets. When there is change, there are inevitably winners and losers. We have already seen a host of filing by community hospitals, physicians’ practice groups and other market participants. Whatever the change that comes 2017, we can expect to see financial distress for those who are not positioned to successfully adapt. When a service model becomes outmoded and is replaced, those who relied on that model must either promptly adapt or face business obsolescence.

With the impending shift at the top of the federal government, it seems highly likely that significant (if not seismic) changes are ahead for healthcare. Whatever their direction, they will inevitably result in business distress for participants in this market and in resulting bankruptcy filings by those distressed participants.

For-Profit Education

2016 saw a number of failures in the for-profit education sector and there is no reason to expect that the trend is ending. These schools had expanded in reliance on loans that were made or guaranteed by the government and their admissions often targeted prospective students of limited means. Promises of job opportunities in a variety of technical and clerical fields brought students eager to seek to improve their prospects. However, many times those opportunities were illusory, leaving the students saddled with debt they could not pay and resulting in large losses on government loans and guarantees. Predictably, the government responded by tightening the restrictions on the loan programs, leading many schools unable to survive. That is a pattern that is likely to continue into 2017.

While the focus of change evolves over time and impacts differing business segments, there remain two reliable constants. First, changes will continue to create financial stress for business segments and even whole industries. Some may be able to restructure and adapt, while others will become obsolete, wither and ultimately vanish. Second, bankruptcy will continue to provide a controlled environment both for restructuring efforts and for liquidation and dissolution of those businesses that cannot find a path to continue.