American Apparel files for Bankruptcy & what can we learn from this?


As we covered the downfall of the Surf Giant Quicksilver last week, another Retail Giant has this week followed in Quicksilver’s less as glamorous footsteps to file for Chapter 11 bankruptcy protection, Fashion label; American Apparel.

Plagued by enormous debts, declining sales, employee woes and long legal battle between the company and it’s ousted founder Dov Charney, the LA based company that was once thought to be the cool American fashion label has filed for Bankruptcy protection on Monday this week.

American Apparel which has raked up approximately US$311m in debt currently has 260 shops & concession-partnership in nineteen countries around the world but has not been profitable since 2009 and has stated that filing for bankruptcy was it’s only option.

AA’s CEO Paula Schneider which took up the job in Jan 2015, has stated that the filing for bankruptcy would allow American Apparel to restructure with a plan that would take 6 months and would cut their debt to just US$135m from the current US$311m.

A good entrepreneur learns from his mistakes, a great entrepreneur learns from the mistake of others so he never have to go through the same route when starting his own business. Today we pick apart American Apparel and what led to their bankruptcy.

1. Deviating branding


When American Apparel started out, they were known for their racy branding of a cool young American Manufactured fashion label. Their ads were often seen to have sexy, good looking and somewhat provocative models, which over the years created a certain negative buzz. American Apparel soon decided to forsake that branding and went for “Positive , Inclusive, Socially Conscious” in an issued presentation in June 2015.

2. Legal Fees & Ousted CEO

In just the 2nd quarter of 2015 alone, American Apparel has accumulated a US$3.6 million in legal fees, primarily due to it’s ongoing legal case with founder and Ousted CEO, Dov Charney, who has been accused of multiple non consensual sexual conduct with his employees.

3. Overwhelming debt

American Apparel has been facing pressure since 2009 where they had to sell 18% of the American Apparel company to Lion capital, a private equity firm. Despite the US$111.6m the company took on for it’s expansion plans for the next 5 years, debt issues persisted and has of June, holds a long term debt of US$243.9m.

4. Diminishing Margins

In 2013, American Apparel sales peaked at US$633.9m but still suffered a net loss of US$106.3million due to it’s diminishing margins. In 2014, their sales recorded US$608.9million but too suffered a net loss of US$68.8million.

While American Apparel and CEO Paula Schneider is optimistic about the future after their restructuring, experts have been quick to doubt their optimism as questions on whether the label would still be desirable by the market after all these bankruptcy news circulating the brand. After all, there isn’t a lack of alternatives in the digital marketing space with sites such as ASOS etc that offers online digital shopping.

What personally scares me the most is that alot of Singapore Entrepreneurs in the retail space are envisioning and embarking on the road that American Apparel is on right now. Expanding too quick and taking on too much debt (i.e from rental of brick and mortar stores etc). As a startup, a business should always try to keep their costs low and not go too far too fast.

As hard as it is to comprehend this having lived through a time where  you head to Orchard to shop and actually purchase stuff, times have changed and today, having a bigger retail space does not equate to more sales. Consumers today are turning to the digital space and is looking online for websites to buy the clothes/stuff they need, hence the importance of SEO services / Social media marketing in the modern era.

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