SourcingJournal

Retailers up Their Experiential Cred With Events, Beauty & Selfies

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By Caletha Crawford

Much has been made of consumers’ changing shopping habits and the effect its having on American malls. As doors close across the country, retailers are looking for new ways to draw consumers in—and often these efforts go far beyond the products on the shelves.

For William Wilson, head of leveraged finance in the Investment Banking Group at Imperial Capital, the reason why retail is struggling is clear: mall-based stores are no longer relevant. We don’t need stores to curate and dictate anymore, he said. Now, we’re looking for them to excite.

“It’s going to be such interesting time for the next 12-to-18 months because for every loser, there will be winners,” Wilson said, referring to the recent slew of bankruptcies. “There are companies, like Zara, that are much more adroit at maintaining the consumer relevance.”

As an example of how stores are rethinking retail, Wilson cites an upscale hardware chain that’s bringing in restaurants to make visits an experience. That natural connection between home furnishings and meal times will allow shoppers to be surrounded in and interact with the store’s product, creating a connection that ideally leads to sales.

This race to relevancy has retailers looking for ways to augment their products with a buying process that delights. And when the Apple Store—the mother of experiential retailers—finds it necessary to refresh its store concept, you know consumers are becoming hard to please.

The tech giant is doubling down on its commitment to hands-on shopping locations with a new launch, even as malls continue to lean on the company’s ability to draw.

“Before, you had stores like J.C. Penney as anchors and you could count on them to bring to people in who would walk through the mall,” said Corali Lopez-Castro, a bankruptcy and commercial litigation attorney for KozyakTropin Throckmorton. She says today’s draw is different. “One non-traditional anchor is the Apple Store. People go in with questions for their phones and they walk through the mall and see the other stores.”

Apple gets with the (in-store) program

The Apple Store, with its open layouts and gadgets invitingly displayed on every surface, has long been considered the a leader in experiential retail, but even the tech giant is looking for new ways to engage consumers.

The company’s new “Today at Apple” program takes the company’s hands-on approach a step further. Now individuals and families can participate in activities like photography, coding and art and design classes. The events will be headed by team members or experts in their fields for those with skill levels from beginner to professional.

“’Today at Apple’ is one of the ways we’re evolving our experience to better serve local customers and entrepreneurs,” said Angela Ahrendts, Apple’s SVP, retail, in a statement on the company’s site. “We’re creating a modern-day town square, where everyone is welcome in a space where the best of Apple comes together to connect with one another, discover a new passion, or take their skill to the next level. We think it will be a fun and enlightening experience for everyone who joins.”

And the best part for Apple fans is the programs are free.

Forever 21 capitalizes on beauty’s boom

Beauty is having a moment, and Forever 21 wants its time in the spotlight.

The fast fashion retailer has partnered with retail property manager GGP to launch 13 Riley Rose beauty boutiques.

“Forever 21 is always ready to expand into new concepts, and has partnered with GGP to open stores in 13 of their top tier locations,” said Do Won Chang, CEO of Forever 21. “These new, experiential spaces will be focused on accessories, cosmetics and home goods for the millennial consumer. We will open 10 stores in 2017, and follow up with three more in 2018.”

With Forever 21’s built in fan base and the natural experiential promise that beauty provides, the companies hope the new concept will create an emotional connection that will draw young shoppers in.

The upcoming launch is the latest move by Forever 21 into a hot category. Last month, the retailer announced it would open 40 new F21 Red locations, which target shoppers on a budget.

Stores get social with selfies

In the quest to keep consumers engaged, retailers, restaurants and even gyms are turning to a social media staple.

The New York Times reports on businesses offering their patrons the chance to snap selfies on site. The move fulfills a few functions, the first of which is fun. Whether they’re sporting a post-workout glow at Tracy Anderson Method studios or pre-wedding glam at the Paintbox nail salon, it seems customers love sharing with their friends.

At Warby Parker shops, the photo booths are also functional. It’s often hard for people shopping for eyeglasses to see what they look like in their potential new frames but the selfie setup allows them to make an informed choice—and get opinions from friends and family too.

Marketing is another bonus these booths provide. With backdrops bearing the business name, each social share gives a bit of free advertising via friends, family and fans.

“When we were planning the restaurant, we wanted clever ways to promote it and differentiate it, and the younger demographic always wants something Instagram-able,” Hellenic Vincent De Paul, owner of Doomie’s restaurant in Toronto, told the paper.

While guests are hungry for the fun selfies provide, businesses are eating up the exposure they bring.

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Restaurant IndustryChapter 11 Bankruptcies

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By David L. Rosendorf

The past year has brought a waveof restaurant businesses filing forreorganization in Chapter 11. With inherently low profit margins, increased competition, limited pricingflexibility and a propensity for expansion without the support of underlying business fundamentals, theindustry is particularly susceptibleto business failure. The recent filings range from luxurious high endrestaurants to casual budget eateries, and often involve hundreds oflocations, thousands of employees, and hundreds of millions of dollars of debt. This article discussesthe causes of the recent trend, andsome of the issues that arise whenrestaurants avail themselves of theChapter 11 process.

A WaveofRestaurant Chapter 11s

  • In March, NYLC, LLC, the owner of Le Cirque, a legendaryManhattan restaurant opensince 1974, filed for Chapter11, blaming temporary cash flow issues. Its first-day filings reflect a projected 15%income shortfall comparedwith anticipated expenses ofmore than $460,000 during itsfirst 30 days of operation inChapter 11.
  • In February, Unique VenturesGroup, LLC, which owns 28 Perkins restaurants that itbought for $38 million, filedfor Chapter 11 in Pittsburgh. Amid disputes among ownership factions, the bankruptcycourt recently directed theappointment of a Chapter 11trustee.
  • In January, Capital Pizza Huts,Inc., the owner of 56 Pizza Hutstores located across six stateswith over 1,400 employeesand $20 million in debt, filed for bankruptcy in Kansas, citing declining gross sales andincreasing food costs.
  • In October 2016, GardenFresh Corp., which operates the Sweet Tomatoes and Sou-plantation restaurant chains,filed for Chapter 11 in Delaware. The group included 125 restaurants, had 5,500 employees, and owed approximately$200 million to its creditors.
  • In September 2016, Cosi,Inc., which operated 72 company-owned “fast casual” restaurants, plus another35 franchised locations, andemployed over 1,500 people,filed for Chapter 11 in Boston.The company, whose stockwas then publicly traded, owed $8 million to noteholders and an additional $15 million to other trade creditors.
  • In August 2016, Roadhouse Holding Inc., the parent company of Logan’s Roadhouse,a Nashville-based chain of steakhouses with approximately 200 locations, 13,000employees, and $400 millionin debt, filed in Delaware; it confirmed its Chapter 11 plan and emerged from bankruptcy in December.
  • Also in August 2016, Last CallGuarantor LLC, which ownedthe Fox & Hound, Bailey’sSports Grill, and ChamppsKitchen restaurant chains, filed for Chapter 11 protection in Delaware the second filing for the group since2013. The company operated79 restaurants in 25 states,and had 4,700 employees.

The restaurant business has always been challenging, and failureis common. Most restaurants operate on very thin margins: after foodcosts, labor costs, lease and otheroccupancy costs, marketing andother expenses, a 5% profit marginis common. Any change in revenuesor expenses can work a substantialdisruption in the business and precipitate a potential filing.

Clearly, some businesses in theindustry perform better than others. Cosi, which never had a profitableyear since going public in 2002, accumulated $300 million in lossesbefore filing. But several restaurantchains are experiencing softening revenues over the past year. And aparallel pattern of recent bankruptcies in the retail sector may signala broader decline in discretionaryspending, suggesting that toughertimes are ahead for the restaurantindustry.

WhyTheBankruptcies?

The squeeze may be coming fromthe expense side as well as the revenue side. Food costs can increaseas diners demand better quality ingredients, but customers don’t necessarily want to pay more for them.Labor expenses may also be on therise, between pushes to increase theminimum wage in some states andadditional health care costs beingborne by employers. The recent political environment on immigrationpolicy may also have an impact,  asmany restaurants have traditionallyrelied extensively on undocumented immigrants, as do many farmers who grow the crops that supply those restaurants.

The pressures may be greateston those restaurants situated in themiddle of the market: “casual dining,” as distinguished from “fastfood” or “fast casual” on one end,and fine dining on the other. Thesetypes of venues, which offer tableservice at a moderate price point,bear all the costs of operating afull-service restaurant — higherlease expenses because they requiremore space, higher labor costs forhosts and servers and bussers anddishwashers, plus their larger operations often require more management support — but they are limited in how much they can chargetheir customers.

Many of these ventures are financed through private equity firms,which can create greater pressureto generate higher returns on thoseinvestments than with traditionalbank financing. If internal, same-store sales will not generate sufficient growth, businesses often lookto expansion as a substitute. But anoveraggressive expansion plan thatisn’t supported by underlying profitability is often a formula for business failure. And, unlike traditionalbank lenders, private equity firmstypically have no hesitation abouttaking back the business and operating it if the loan goes into default.

What CanBeAccomplished InARestaurant Chapter 11?

Lease Issues

A common factor among manyrestaurant Chapter 11s is a poorly

executed expansion plan. Often,one of the first steps in rehabilitating a restaurant business is paring back getting rid of unprofitablelocations and refocusing on profitable aspects of the core business.Rejection of unprofitable leasesunder 11 U.S.C § 365(a) provides amechanism for doing so, while also

providing the benefit of cappinglease rejection pursuant to 11 U.S.C.§ 502(g). Moreover, since lease rejection claims will be classified withother general unsecured claims fordistribution purposes, the value ofsuch claims may be fairly minimal.As a result, even the anticipationof a likely Chapter 11 filing maybe sufficient motivation for a landlord to negotiate a consensual leasetermination on favorable terms inadvance of an actual filing, and potential debtors often should pursuesuch negotiations before filing.

On the other hand, sometimes arestaurant business may file Chapter11 in order to keep its lease. Thatseems to be the case with Le Cirque,whose first-day filings indicate thatthe bankruptcy was triggered by anotice of default on the $95,000/month lease for its Upper East Sidespace. Although 11 U.S.C. § 365(d) (3) requires the debtor-in-possession to timely perform all post-petition obligations under a lease untilassumption or rejection, a debtormay seek to extend its time for performance for up to 60 days; thoughif Le Cirque fails to address its cashshortfall issues, such an effort maynot be successful.

In a sale scenario, Chapter 11 alsofacilitates the process of assumingand assigning retained leases toa purchaser pursuant to 11 U.S.C.§ 365(b) and (f), while simultaneously providing one forum for addressing and resolving issues relating to cure obligations in connectionwith the assigned leases.

 Franchise Issues

The recent spate of restaurantChapter 11s has primarily involvedcompany-owned chains. But theindustry also includes a number offranchise operations, which raisetheir own set of issues in Chapter 11.

Where the debtor is the franchisee, one of the key issues is the assignability of the franchise agreement. In particular, the provisionsof 11 U.S.C. § 365(c)(1), which provide that an executory contract maynot be assumed or assigned if applicable law excuses a non-debtorparty to the contract from accepting performance from or renderingperformance to an entity other thanthe debtor, can restrict the debtor-franchisee’s ability to assign thefranchise agreement to a third party.

When a franchise agreement confers the right to use a trademark,as is usually the case, the franchisor may have the right under theLanham Act to refuse to accept orrender performance to a third-partyassignee, and courts have held thatthis right remains enforceable inthe bankruptcy assignment contextpursuant to § 365(c)(1). See, e.g., Inre Wellington Vision, Inc., 364 B.R.129 (S.D. Fla. 2007). Indeed, assumption of such agreements canbe prohibited even in the absenceof assignment to a third party. SeeIn re Trump Entertainment Resorts,Inc., 526 B.R. 116 (Bankr. D. Del.2015); In re Kazi Foods of Michigan,Inc., 473 B.R. 887 (Bankr. E.D. Mich.2011). As a result, a franchisor mayretain a significant degree of controlin a franchisee bankruptcy.

debt is converted into equity in the reorganized debtors; after general unsecured creditors other than the lenders receive $1.5 milli

If the debtor is the franchisor, the potential rejection of the franchise agreement can create another set of issues. Under 11 U.S.C. § 365(n), the licensee of a right to intellectual property under an agreement rejected by a debtor-licensor has the option to either: 1) treat the contract as terminated by the rejection, if the rejection amounts to such a breach as would permit termination under applicable law or another agreement of the licensee; or, 2) retain its rights under the licensing agreement and any supplementary agreements to the intellectual property, for the duration of the agreement and any applicable extensions as of right.

In other words, the debtor franchisor cannot terminate the non-debtor franchisee’s right to continued use of the intellectual property for the duration of the agreement, if the franchisee so elects, rather than treated the agreement as terminated. See Sunbeam Products, Inc. v. Chicago American Mfg., LLC, 686 F.3d 372 (7th Cir. 2012).

 Sale Process and Balance Sheet Restructuring

 Often, restaurant businesses will file Chapter 11 to facilitate a sale of the business as a going concern. Sections 363 and 364 of the Bankruptcy Code provide the means to obtain additional debtor-in-possession financing to continue operations until a sale process can be conducted and closed, while also providing the means to sell assets free and clear of the claims of creditors, and assuming and assigning leases and executory contracts to the purchasers.

But the market for these restaurant assets does not exactly appear robust. In the Garden Fresh case, an auction sale was canceled after no qualified bids were submitted,resulting in the approval of the sale of the debtor’s assets to the “stalking horse” bidder in January 2017 effectively, a credit bid by the debtor’s prepetition secured lenders. Cosi likewise canceled an auction sale when no competing bids were submitted above a stalking horse bid from the pre-petition and debtor-in-possession lenders.

Cosi’s revised Chapter 11 plan, rather than proceeding with an actual sale, now provides for what amounts to a “virtual sale” which represents an approximation of the value associated with the stalking horse purchase offer. Under the Plan Settlement proposed by the Cosi plan, $5 million of the lenders’ on, the noteholders and general unsecuredcreditors share in additional funds available for distribution. The plan is projected to yield a 10%-20% distribution to general unsecuredcreditors.

In other cases, restaurant businesses may emerge from bankruptcy by restructuring debt rather than pursuing a sale process. In Logan’s

Roadhouse, for instance, the holders of $400 million of long-term secured debt agreed to convert most that debt into equity, reducing the company’s long-term debt to $100 million, and creating a $1 million fund to pay the company’s unsecured trade creditors. Though that $1 million was only projected to provide about a 3% recovery, it was still likely a better result than liquidation, which would have yielded nothing for trade creditors, while putting several thousand employees out of work.

Conclusion

 As bankruptcy practitioners know, Chapter 11 does not magically fix underlying business issues. Restaurant chains that have made multiple trips through Chapter 11  like the Fox & Hound group, and Sbarro before it will attest to this fact.Chapter 11 provides a fresh start, but it’s still up to the company to create a recipe for future success.

 David Rosendorf is a partner in the Miami-based law firm of KozyakTropin& Throckmorton, LLP, and focuses his practice on business bankruptcy and other commercial litigation. He has over 20 years’ experience representing debtors, creditors, asset purchasers and other parties in Chapter 11 bankruptcy proceedings, including clients in the restaurant and hospitality industries. He may be reached at dlr@kttlaw.com

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CorporateCounselor

Finding the Right Outside Counsel For Your Company

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By Javier A. Lopez and Monica McNulty

In today’s challenging, competitive business environment, finding qualified outside counsel with the right fee structuresis a top priority for corporate counsel. Following is some practical guidance to help corporatecounsel achieve this goal.

When retaining outside counsel, corporate counsel should focus on three key areas: 1) Conducting thorough research ofthe potential firm’s reputation, particularly its billing practices;2) Exploring flexible billing arrangements that are tailored to suit the nature of the engagement; and 3) Effectively communicating to create clear goals, strategies, and billing guidelines. By taking these steps, in-house and outside counsel canestablish productive relationships that will help prevent unwanted surprises from appearing on the bill.

Targeted research of The Potential firm’s Billing Practices and Reputation

After identifying several firmswith experience in the area oflaw for your engagement, it isequally important to vet thosefirms’ billing practices and reputations with respect to attorneysfees. Your network can provide in-valuable information about the billing practices of a particular firm. Your best resource to get a realisticperspective on their billing practices is their existing and former clients, or former attorneys who wereemployed at the firms. The legalcommunity is very tight. By tappinginto this resource, you can get asense of hourly rates, the nature ofthe firms’ time entries, and whetheryour contacts believe that the billingand the work product were in alignment. Even if your contacts workedwith different practice groups thanthe one you might be considering,there should be a significant degree of continuity between one area andthe next within the same firm.

During your initial contact withthe firm, ask for a budget for thedifferent phases of the litigation:Pleadings, Discovery, DispositiveMotions and Trial. This will helpyou compare apples to apples andassist you in selling which lawfirm you believe to be the correctone to your Board/CEO. Although every case is unique, if the firm recently handled a very similar matter, it is possible that it will notneed to duplicate certain tasks,which could result in a decreasedoverall fee for your matter. Forlitigation matters, another important factor is how well potentialcounsel knows the relevant court system or judge. In many cases,counsel’s understanding of the judicial circumstances of a case canhelp inform how quickly or slowlythe case is likely to proceed, and estimate how it could impact total fees. Intimate knowledge ofthe particular judge before whoma matter is pending is absolutelycritical to the bottom line of a case.There can be a stark difference inthe ability to get hearings in frontof a particular judge. For some, itcan take days or weeks; for others,it may take months.

When establishing a relationshipwith new outside counsel, considerproposing a “test run” with a smaller, less complicated matter that is likely to be resolved quickly. Thiswill give you a first-hand sense ofthe firm’s billing practices and allowyou to make an informed decisionbefore engaging the firm for morecomplicated matters. Giving thenew firm the opportunity to earnyour business and demonstrate thequality of its billing practices is thebest way to get the flavor of howthe firm works a case. Should you decide to later engage the firm formore complicated matters, you willhave already laid the groundworkand established expectations for thefirm’s bills.

Explore Flexible Billing Arrangements

Both inside and outside counsel have long had a relationshipof necessity with the billable hourmodel. However, alternative fees arrangements continue to become increasingly popular and may suit theneeds of certain engagements betterthan the traditional billable hour arrangement.

Pure Contingency

In a pure contingency arrangement, the law firm receives a fixedamount or percentage from any potential monetary recovery in a lawsuit. Usually, the client will only paythe hard expenses during the litigation. This structure is most commonfor plaintiff’s cases that may lead toa reasonably large potential recovery. In a pure contingency arrangement, the law firm bears nearly allof the risk of the engagement andis, therefore, invested in obtaining afavorable outcome.

Hybrid Fee Arrangement

In a hybrid fee arrangement, thelaw firm receives a percentage of itsusual hourly rate, and some level ofcontingency fee dependent on theoutcome of the matter. If the matter does not yield a favorable result,no additional fee is paid. If the firmobtains a successful outcome, it ispaid the agreed additional amount.Such arrangements shift part of therisk of the engagement to the law firm, and align the client and thelaw firm’s interests. This approachlets the firm have additional “skin inthe game.”

This arrangement is most common in plaintiffs’ cases, but can alsobe used on the defense side to create and reward the accomplishment of certain benchmarks or particularoutcomes. It can also be used on thedefense side to reward an ultimateoutcome that is significantly lessthan the amount the client is beingsued for.

Under such an arrangement, thefirm may agree to accept a reduced hourly rate, in exchange for the client’s agreement to pay a percentage of the difference between theamount the client is being sued forand the ultimate outcome. For example, the client may agree to paythe firm $300 per hour, althoughthat is significantly lower thanthe firm’s standard rates, and pay 30% of the difference between theamount sued for and the ultimateoutcome. If the client was sued for$2 million and the case was ultimately settled for $1.5 million, theclient would pay the law firm 30%of $500,000 or $150,000 at the endof the case. The hybrid fee arrangement allows significant room for creativitybecause benchmarks with a smallaward can be set throughout thecase and for a variety of reasons. Forexample, benchmarks might be setfor length of time for disposition ofthe matter to incentivize quick resolution, various outcomes (differentawards for settlement, prevailing at summary judgment, or prevailing attrial), or success on specific issuesin the case.

Blended-Rate Arrangement

A blended rate is another availablealternative fee arrangement. Under ablended-fee arrangement, the hourlyrates of each of the attorneys on a file are considered and a single hourly rate is determined that applies to all attorneys. For example, the seniorpartner may typically charge $800per hour, the junior partner $650per hour and the associate $400 perhour. Based upon these rates, a single hourly rate of perhaps $500 per hour would be established for all attorneys billing on the file. This maybe most appealing in complex matters in which junior and senior partners are expected to do a significantamount of work, as it could help create sizable savings for the client.

Another possibility is to create astructure that rewards law firms forsubmitting bills below budget, for example, by awarding a percentage of the amount under budget.As an example, if the overall budgetfor a case is $500,000, but the caseis resolved for $350,000, the clientwould agree to pay the law firm apercentage of that savings.These are only a few examplesof possible alternative fee arrangements. Law firms are becoming increasingly willing (or should be) toevaluate these possibilities. The old mentality of “take it or leave it” bythe big law firm has gone by thewayside as the business of law hasevolved. You should feel absolutelycomfortable negotiating an arrangement that is beneficial for both yourcompany and the law firm.

Javier A. Lopez is a partner withKozyakTropin& Throckmortonand focuses his practice on litigation. Monica McNulty is an associate in firm’s healthcare and complexlitigation practice groups. They canbe reached at jal@kttlaw.com andmmcnulty@kttlaw.com, respectively.

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