Restructure your debts so that you can keep your store open for the customers who have grown to count on you.
Recently, there has been a steadily increasing stream of stories about New York supermarkets and groceries filing for bankruptcy. Long-time supermarkets like Tops Markets have been forced to file for Chapter 11 protection in hopes of saving their business. But this phenomenon hasn’t been limited to large chains; small family grocers are also feeling the squeeze.
This week, I received a phone call from one of those small business owners. He has been running the same neighborhood grocery that his parents opened years ago. The last few years have been lean, but this year has pushed them to a breaking point.
The caller felt that he was being squeezed from both ends. His high-end competitors were drawing away customers with organic, premium foods and upscale dining. Meanwhile, some discount retailers in the neighborhood began offering groceries at deep discounts. These factors have combined to cause the caller’s costs to rise and his customer base to shrink. He knows that without making significant changes, the grocery store that his family has operated for his entire life will have to shut its doors.
While the long-time grocer acknowledged he was in a tough spot, he was also confident that the family business could become competitive again if he could just hang on long enough to restructure the business and re-negotiate with some suppliers. He said he understood a Chapter 11 bankruptcy might help, but he had a lot of questions regarding how the filing might affect his business:
- Would he be able to pay his employees?
- Would he be able to honor gift certificates and customer loyalty rewards?
- Does the bankruptcy process make it easier to negotiate with his creditors?
- Can’t he just work out new deals with his creditors without having to file bankruptcy?
It was clear from our conversation that he had a lot questions about whether filing bankruptcy makes sense for his company. Luckily, I have the answers.
Volatility in the Grocery Industry
The unfortunate part about the growing trend of New York grocers filing for bankruptcy is that the industry was hoping a rebound was coming. Years of pricing wars had led to difficult margins, but the lowering price of food was supposed to usher in a more profitable era for grocery stores. It didn’t happen like that. Now, competition in the New York grocery market is more competitive than ever. International grocers are moving in and pushing prices down. Online competitors like Amazon are making moves to cut groceries out of the equation entirely.
New York is at the center of these struggles. Fierce competition in the industry coupled with online and international competitors taking up market share has made it difficult to stay afloat. Like with many industries, Amazon is stepping into the grocery business. What’s more, they’re cutting out the grocery industry altogether by pioneering online grocery delivery. With Kroger and Wal-Mart following suit, there is no doubt the competitive industry will only get tougher.
Despite that, the grocer I mentioned above felt confident. He has been serving the needs of his neighborhood for most of his life, and he felt certain if he could just buy himself a little time he could correct course and save his business. Luckily, that’s something an experienced bankruptcy attorney like myself can help him with.
The bottom line: the grocery industry is changing rapidly, and it’s never going back to the way it used to. In fact, the current volatility grocers face is likely the new normal. But as I explained to the long-time grocer that called me, that doesn’t mean small groceries are doomed. If your grocery is facing overwhelming debts, a Chapter 11 restructuring may give a grocer time to reshape their business in a way that can survive the new age of online groceries and deep discounts.
Buying Time to Restructure
The beneficial thing about a Chapter 11 bankruptcy is that it not only gives your business a fresh start, it also will allow you to continue to operate uninterrupted while the bankruptcy runs its course. But just filing for bankruptcy protection isn’t enough; without an effective plan for restructuring a business won’t fare any better after a bankruptcy filing than it did before. That includes the possibility of renegotiating with creditors, employees, and unions.
Renegotiating with Creditors
If your grocery store has hit hard times, it’s likely that you have a tenuous relationship with some of your creditors. Tough decisions have to be made to keep the lights on, and that means that sometimes one creditor will be favored over the other. At the end of the day, you will need a relationship with your creditors to continue operating. After all, you can’t run a grocery without suppliers.
While the automatic stay will give you a chance to get your business on solid footing immediately after filing, it will be critical to work out a solution to your past due accounts. A bankruptcy filing may protect you from your creditors in the short term, but if you want to continue to operate after bankruptcy you will need to settle your accounts and work out a new relationship with your suppliers moving forward. A failure to do so will likely be the end of your business.
Luckily, Chapter 11 bankruptcy is ideal for these negotiations. During the bankruptcy process, you will have the opportunity to restructure your debts in a way that will allow you to pay them going forward. It’s possible that, through your bankruptcy attorney, you will be able to negotiate better interest rates or more favorable terms. In some cases, your bankruptcy attorney may be able to reach a settlement for a percentage of your debt. Grocery supplies need customers, and in some cases it is in their best interest to accept a partial payment and keep a paying customer moving forward. These negotiations can be complicated, and any restructuring of your debt will have to be approved by the court and the U.S. Trustee. That makes having an experienced bankruptcy attorney important during this process.
Renegotiating with Employees and Unions
Negotiations don’t end with your creditors, however. In many cases, you will have contracts or agreements with employees that you can’t sustain moving forward. In some cases, you may have the added complication of dealing with unions when attempting to renegotiate.
This issue is one of the things the grocery store owner I spoke to is facing. Most of his employees are employed at-will, but his store manager is under contract. This manager has been with him for years. A trusted guy, the manager started bagging groceries and worked his way up to a very favorable contract that was negotiated during better times. The grocery owner doesn’t want to lose a good employee or breach a contract, but he’s worried they’ll all be without jobs if the contract isn’t renegotiated. That’s something I can help him with.
Renegotiating with employees or their unions is never easy. But just like in the case of creditors, many employees will understand that it’s better to come to a new agreement than be without a job. That is exactly what happened in the Tops Markets bankruptcy, where the company reached an agreement with the local Teamsters to settle a pension dispute.
With an open mind and an experienced bankruptcy attorney, it’s possible to restructure your relationship with your employees without going under in the process.
Protecting your Customers
While every business in Chapter 11 has to consider restructuring their obligations to creditors and employees, grocery stores have unique considerations related to their customers that they must take into account. Many grocery stores have developed loyalty programs, and there are special requirements regarding gift cards for businesses that are in bankruptcy.
Loyalty Programs
Loyalty points have become the rage in many industries, and grocery stores have gotten in on the act. But what happens to these points in a Chapter 11 bankruptcy? The truth is, it largely depends on the grocer’s plans moving forward.
In other types of bankruptcy like Chapter 7 filings, it is routine that loyalty programs are simply dissolved along with the assets of the company. But Chapter 11 is different, in that the purpose of the bankruptcy is restructuring the business to continue operating. Because of this, it is largely up to the business if keeping the loyalty program is worth it. After all, the program was created for the purpose of retaining customers. With the competitive nature and the low margins of the grocery business, it’s possible a grocer may feel these programs are important to compete. What’s more, there may exist a fear of customer backlash moving forward if the program is ended abruptly.
The decision to honor loyalty points isn’t entirely up to a debtor, however. The court and the Trustee most approve of any plan, and there is no guarantee that they will.
I know that every business is different. That’s why I work closely with my clients to help them create a bankruptcy plan that will keep their business running long after bankruptcy protection ends. My experience and knowledge will go a long way in helping a struggling grocery store to decide if maintaining a loyalty program is the right call moving forward.
Gift Cards
Gift cards operate a little differently than loyalty programs. These aren’t just perks or discounts you hand out to certain customers; gift cards essentially represent prepaid purchases that can be redeemed at a later date. In other words, a gift card holder is technically one of your creditors. Like with loyalty points, gift cards are often no longer honored in Chapter 7 bankruptcies but regularly continued during Chapter 11 restructuring.
If a grocery store currently in Chapter 11 has outstanding gift certificates at the time of filing, they can petition the court to set a cutoff date for the use of those cards. After that date, those gift certificates would no longer be valid. While this is typically done when businesses are being liquidated in bankruptcy, some restructuring businesses have cancelled gift certificates as part of the process. Typically, if the bankruptcy court agrees to let a debtor stop honoring gift cards, they will be required to publicize the final date gift certificates will be accepted.
The most unusual thing about gift cards in bankruptcy is that any gift card holder that does not redeem their card before the cutoff date can file a proof of claim in your bankruptcy like any other creditor. This is rare, but not unheard of. And while a $100 gift card is likely at the bottom of the Trustee’s priority list, it’s at least possible some of you business’s assets will have to be set aside to pay back these gift card creditors.
Structured Settlements vs. Chapter 11 Restructuring
The grocery store owner I had been speaking to still had lingering doubts. This was his family business after all, and he was a proud man. The thought of saving his business without filing for bankruptcy sounded tempting.
“Let’s cut to the chase. I can restructure my business without filing bankruptcy, right? I saw ads online about help with that without having to file. Why should I spend money on a bankruptcy attorney if I can do it without filing?”
My answer was simple: there are companies that will happily take your money and attempt to help you restructure your family business outside of the bankruptcy process. But without the protection of the automatic stay, you have no way to stop your creditors from coming for you before you restructure much of anything.
It’s possible to restructure a business without the protection provided by a bankruptcy filing. Banks will often enter into forbearance agreements, secured creditors may agree to delayed payments until after certain assets are liquidated and unsecured credits may just be happy to get paid something instead of getting stuff.
The problem is, any one of these creditors can upset the apple card. If a secured creditor is tired of waiting, they can start collection efforts that could shut your store down no matter what arrangements you have made with other parties.
Ultimately, the grocery owner I spoke to was just looking for a chance to keep the business his family has depended on for decades afloat. For business owners in his position, hiring an experienced bankruptcy attorney to guide them through a Chapter 11 restructuring is the best option for getting a chance to save their business.