Going to the wall: Are bankruptcies a good thing?

James Bateman

The stream of bankruptcies that we have seen in the UK so far this year, with familiar high street stores of not only our childhood, but that of our parents and perhaps even grandparents disappearing, is at once shocking and unsurprising.

We know, after all, that we are in a prolonged period of tough economic conditions (some might term it the ‘great recession’) and, perhaps more importantly, we know that many business models are becoming obsolete. But does this necessarily consign the companies themselves to history, or should it just mean that a different, more innovative and effective strategy is needed?

I was prompted to think about this when I read a commentary arguing that bankruptcies were a good and necessary event in the healing of an economy. The argument is that economics teaches us that firms must be efficient, and in easy market environments, even poorly-run and inefficient businesses can thrive, and it is the ‘role’ of recessions to remove these inefficient companies.

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I do not subscribe to this view: if recessions have a ‘role’ (and this is anthropomorphising part of an economic cycle, which in itself is probably a stage too far) then that role should be to force companies to be lean and efficient, but not to force them out of business.

Let us consider two notable collapses in turn – Blockbuster and HMV. For the first of these, it is hard not to argue that the video and DVD rental market was in an inevitable spiral of decline. The internet has seen to this and a business with all of the costs of physical stores and products cannot readily compete with a download service, or indeed with a rent-by-post service.

So LoveFilm, and its peers, along with iTunes and Sky/Virgin’s on-demand services, probably spelt doom for Blockbuster’s business model. But I would contend that even here – possibly the most extreme case – a slimmed down, smaller business might have had legs. And, specifically, the brand had power – perhaps had it moved early into online, it would have maintained the dominance it had established on the high street.

A failure to recognise the inevitable trend and to cannibalise its existing physical store business probably sowed the seeds of failure a long time ago.

On to HMV – a store that seemed to be perennially popular with the young, despite the iconic dog and gramophone logo seeming remarkably anachronistic. The company clearly recognised that online competition – able to price much lower because of lower costs, irrespective of Amazon et al’s tax advantages – was a threat.

The response, however, was to diversify into a variety of electrical goods, from tablets to headphones, which from my observations took up a lot of floorspace, proved popular for browsing, but equally were possible to buy online at lower prices – so out of the frying pan into the fire with further online competition.

This strategy also meant a significant reduction in the space devoted to traditional products – CDs and DVDs. As with books, this is a tricky area to compete against online. But if the only competitive advantage that you have is that ability to leisurely browse and find titles of interest – perhaps that you never knew you needed, I am strongly of the belief that making the browsing experience significantly less enjoyable – because it is more cramped – and reducing the available titles – cannot do anything other than to hasten the decline.