Rundown: Joann's second bankruptcy, Walgreens looks for new anti-theft solutions & new FDA health proposals

0:03Hi, and welcome to the Modern Retail Rundown. This is senior reporter Gabby Barco, and I'm here with editor-in-chief Kale Guthrie-Weisman. Hey, Kale, how are you today? Doing well. It's another chilly day, New York City, but a bunch of news happened this week and we get to talk all about it, right? Yeah, exactly. I was going to say, I was realizing that we're only like maybe two weeks into the new year, but it's felt forever. News-wise, it just all came tumbling down. Yeah, I feel like it's so many new announcements. We're not even going to hit on it this week, but you keep hearing about executive transitions.

0:43I feel like this is the time when a lot of news dumps happen and big changes are brought forward. Yeah, exactly. And we're not even getting into the TikTok ban of it all. I mean, that's a whole different can of worms. No, I mean, but read modernretail.co. We've got a lot of coverage on it. Yeah, exactly. That's a quickly developing story by the hour. But yeah, on this week's episode, actually, we're going to start off by talking about Joanne, the fabric store, which just filed for its second bankruptcy in the past year. They had filed their first one last March, which we had spoken about on the show.

1:19So we'll do a little update on what's going on there. then we're going to talk about this is an interesting turn of event too which is that retailers are realizing that locking up their products has some downsides in this case Walgreens CEO pretty much admitted that you know it is hurting sales even though you know they're doing in the name of reducing theft or shrink so yeah that's interesting we'll we'll talk about that later. And then lastly, we're going to talk about all of the FDA announcements that have come out in the last few days, you know, their new red dye three ban, and then they have this new proposal about health labels that we'll talk about.

2:04So it will be impacting big food and beverage companies pretty, pretty greatly. So yeah, first up, let's talk about Joanne. So this is, like I said, second filing in under maybe nine months now. It seems like the first one did not take, but this is a company that has been struggling for years now. So it's not like this is a year long struggle by any means. So for background, and if you're a longtime listener of the Modern Retail Rundown, I'm pretty sure we talked about this back in March, but March of 2024, Joanne filed for bankruptcy. Now it's doing it again. And pretty much it has new problems that emerged before this transition from the first bankruptcy came to pass.

2:55It has a bunch of debts. There's some inventory issues. We'll get to that in a second. But the interim CEO, Michael Prendergast, he said in a statement, after carefully reviewing all available strategic paths, We have determined that initiating a court-supervised sale process is the best course of action to maximize the value of the business. We hope that this entire process enables us to find a path that would allow Joanne to continue operating as a going concern. So essentially, it's up in the air as it stands now that the company will be able to even exist. I think it has 800-something locations.

3:32and this is what it's determined is the only way, even though it received a lifeline, what, like 11, 10 months ago? Yeah, we'll talk about what it is that they are going to try to offload because their big issue is debt, right? Which is kind of what led to this. It's about$615 million in debt at this point. It used to be even more, I believe. Yeah, so I think the issue debt, As with any company that is even thinking about filing for bankruptcy, usually it's that you have a lot of debtors and you don't have a way to pay them out. But I think there were a confluence of issues specifically that the debt load was high, had to pay these people, but also that it had a bunch of inventory issues, which I thought was really interesting and something that we haven't really heard much about on the Joanne side.

4:24And along with the usual story that we've heard with a lot of the other legacy retailers, slowing demand. So when you put all those three together, the business model wasn't working. And so, but I think the inventory issues is something that I want to just highlight because I thought this was really interesting. This is from the CNN article that wrote about the bankruptcy, but CNN wrote, Joanne blamed inventory issues that were, quote, acute and unexpected, revealing in court documents that it faced, unquote, unexpected ramp down and in some cases, the entire cessation of product of important items that shoppers come to the store for.

5:02That stunted sales and put its$615 million debt in an untenable position. So essentially, before the first bankruptcy, it had over a billion in debt. It was able to essentially have that to make it a little over, you know, around 600 million, still a lot of debt, no doubt. But then it received these inventory issues, which I really want to dive into later on and like to see exactly what that means. But essentially, it was unable to bring the products in that people needed. There was a slowing down of all of this stuff. And then there were also issues of just people buying the products. And that meant that the situation that they thought would help it emerge victorious or staying afloat back in March, I think it exited bankruptcy the first time in June, if I'm not mistaken.

5:46Somewhere between then, it realized that it wasn't enough and that it needed to do something else. Yeah. And I was surprised that just the sheer amount of assets that, you know, is including in its filings. I mean, this is everything from store furniture to leases to even its IP is on the table. I'm trying to figure out whether this is pretty normal in most cases. But my question is like, what is going to be left, I guess, afterwards? And, you know, of course, you can close stores. But the goal here is to keep some semblance of a business, right? Yeah. And I think probably they want a buyer who will be able will own, you know, all of these assets, but be able to keep them going under, you know, similar to how it was before.

6:33That is what I guess they're trying to do. But clearly, it needs to get raise a lot of money. And so it needs to put all of these on the line to do it. I guess the debt has been reduced pretty significantly since the last year's bankruptcy, which was at$1.1 billion. This is long term debt. So they did make a dent into it, you know, they were able to pay back some obligations. This is usually like a big point of contention, which is your vendors, landlords, even employees in some cases are paid back. And then at the time, the company did say it was going to try to keep all of its stores open. I believe, you know, I think at the height of COVID, they were really investing pretty heavily in their stores, you know, and making them more experiential.

7:19So yeah, this is obviously setting them back quite a bit. Yeah, it's setting them back. I mean, these problems did not begin in early 2024. We've written a lot about all of the ways Joanne was, quote, trying to reinvent itself. You know, it received a modest lifeline when there was the crafting boom. But like, as with all booms, there are busts. And so it didn't didn't quite work out. And I just I think that probably it seems like what happened was in March, it said it needed this amount of money and this help from from investors. it did that. And then in the months before it closed, the problem got even more acute, and it realized that it wasn't going to be enough.

8:00And so it just had a big issue of cash flow. It was just a shortfall of cash. And so that's where it is now. And now the big question is, at the time in March, it was not... I don't know if surprising is the right word, but it was noteworthy that the company was going to keep all of its stores open. And like usually in bankruptcies, that's not the case. And so I wonder if that will remain the case going forward with the second iteration. Yeah. Well, speaking of lifelines, maybe this is a good time to talk about who are the potential lifelines, I guess, if you could say, that are going to be coming in.

8:37There's talks that there is Gordon Brothers Retail Partners, which we actually did talk about pretty extensively lately, which recently bought big lots. But yeah, I guess we're trying to see if there are other bidders, right? I mean, this is so a lot of money. So I imagine it's going to have to be some sort of PE player that is going to have to do this. So Gordon Brothers is the stalking horse, meaning that they've talked with them before and got them to say, we will put the first bid in. So it could very well be them. But also, as with all of these things, it depends on who else joins and decides they want to do it.

9:15It could be a big PE, a consortium. That's happened many times before. But it is really interesting that this one organization just bought another ailing retail player as well. But they seem to be at least trying to be on a spree. But we don't know what will happen once the proceedings really start. Yeah. And then I think with that, some layoffs probably will also be coming. There was a recent Warn notice that said that Joanne said it might lay off 661 corporate employees if this plan doesn't end well. It's a very specific number of people. But for now, I guess this is really the plan. We don't really know what the future of the company is.

10:04But I feel like we have talked a lot about retail bankruptcies in the past, you know, maybe 12 to 18 months. So there seems to be a little bit of a playbook developing. I don't know if you feel that way, but there's kind of like two routes that most of them take, which is either, you know, you got like your Rite Aid, sort of like closing a bunch of stores, restructuring pretty much from scratch. And then you've got this hope for an acquisition, you know, or somebody to bail you out. and everything else that's in between is something in the middle. Yeah, I mean, it seems like we're just seeing a lot of issues come to a head now.

10:42And I think a lot of retailers were in a holding pattern a few years after the pandemic. But with debts continuing to rise and demand not going up and it being an economically precarious point, a lot of these places aren't able to keep their inventory fresh. They're not seeing more customers come in. And so this is when they're realizing they're not going to be able to pay all the people they owe money to. And so we're seeing this come into play. I mean, I wouldn't be surprised if as part of whoever takes over, you know, Joanne, that they do end up closing a lot of stores. We'll have to see what that is.

11:19But also the company, as you said, the 661 corporate employees, I think that that's actually might just be all of the corporate employees. and the company is saying that we're going to shut down unless someone swoops in. And so I think that's the big question is whether we've seen other retailers, I think Big Lots being a great example where it thought it had a deal for a bankruptcy and then it didn't. And then at the end of the day, it did. I think Joanne is preparing for the possibility that even if it does have a stocking horse bidder in play, the terms might not be right. It might not be able to stay afloat.

11:52And then the company just might fold. So it's definitely something we'll be keeping an eye on. Yeah. All right. Well, speaking of big struggling retailers, maybe this is a good time to move on to this news or, you know, from Walgreens that came out this week, which is that its executives are basically trying to figure out what to do about their the decision to lock up a lot of products. And if you've been to a drugstore or big box store in the last year or so, you probably are familiar with having to push a button and wait for someone to open the deodorant case to purchase one. So yeah, this past week, Walgreens reported its quarterly earnings.

12:35And one thing that stood out was that its CEO, Timothy Wentworth, said that having more products in lock display cases, quote, does impact how sales work through the store. Because when you lock things up, for example, you don't sell as many of them. We've kind of proven that pretty conclusively. Thoughts? I mean, Kel Suprise, I guess is what I would say. Like, yeah, if there have been many times when I've gone into a Walgreens or Rite Aid, a CVS, and I push the button and I wait and no one comes. I also get fewer items. But if they don't come, I leave, you know. And also, on the other end, I realize I could just open up my phone and buy it on Amazon.

13:19It would be at my door tomorrow. So, like, I think there are dueling things here where it's like, yeah, you have these stores. They're very convenient. But if you're making them less convenient by having these things in the way for getting you to buy them, then of course your sales are going to go down. And we should be clear, Walgreens said this a few years ago where the maybe we cried. What was the quote from a few years ago? I'll find it. But pretty much they said, I want to say in 2022, maybe we cried a little too much over retail theft because they were really hyping the problem, put everything behind a locked case.

13:54And then they realized that things weren't going, but they've been keeping with this strategy. And now we're seeing that it leads to reduced sales. Yeah. And your example of opening up your phone, it's like as if physical retail didn't have enough problems competing with with e-com, right, which is basically the convenience is really what people go for. But the other thing is that it's become such a big thing where it's no longer just expensive razors, right, which is kind of used to be the big category behind it. It's everything from I mentioned deodorant, hands soap, pretty basic, not so expensive things.

14:30And that's where you're like, okay, well, I'm not going to wait for, you know, hand soap right now. Well, it's also like very capricious. And like, I know that this is like getting a little very consumery. But like, I'm always so interested in what they lock behind cases and what they don't. Like certain soaps, yes. There's like, this is a really weird example, but like I use a body wash. And if you go to one section of Walgreens, it is behind a locked case. But I also know they have it in another section of my Walgreens that it's not behind a locked case. And it's like, it seems very random and that they just have a bunch of these locked cases now and put things in there.

15:06There probably is a rhyme or a reason, but I have not been able to figure it out. And so it seems like it was a very draconian strategy of just like, we're going to put, we're going to implement these on all of the shelves. And also, sorry, I'm really complaining right now. I feel very bad for the person whose job that is. I think about this. When I'm waiting for a prescription, there's one to two people who they're literally running around the store because every three minutes you hear the ring. And it just seems like the most inefficient way to run a retail business, but it has become scaled throughout the country.

15:39It's wild to me. Yeah, yeah, the poor Target employees near me are always ready. The other thing is, it really does impact your shopping experience. I don't know about you, but sometimes I'm like, well, I really want to compare these two products. And like, the person is just like, all right, can you just like pick one already? And I'm like, yeah, exactly. Usually I'm like, oh, I don't know. I'm reading the labels. Yeah, it's a very humanizing shopping experience, let's just say. Yeah, it doesn't. And I, I mean, I would love to read whatever the reports that they have about why it works or what its impact is, or, you know, maybe they brought in, you know, some consultants who recommended they do it, but it seems it happened, or they've had a lot of cases for years, but the ramp up has been relatively quickly over the last few years.

16:24and it just seems like it has made an already not amazing shopping experience even worse and so that they're coming to the conclusion that that leads to slowing sales now but they're not really introducing any big change uh that i don't know it's just it's just wild to me yeah we'll talk about what they said i mean there it seems like they're still trying to figure that out but uh we should say that you know retailers like walgreens were yeah like they were sort of at the forefront of blaming shrinkage on theft and organized retail crime, which is different, actually, than what this issue is. But yeah, they had experienced a 52 % increase in shrink between 2020 and 2021.

17:09And then that number, you know, stabilized since but they, you know, they say that locking up products is ineffective. Actually, you just mentioned that and McKinsey came out with a report recently saying that, you know, that the last thing you should do is lock your products in cases for all the reasons we just mentioned. But then the NRF report that really ignited this to begin with, I think that's what you were referring to last year, which is that, you know, NRF basically walked the same thing back, which is saying that like, actually, I think that might have been blown out of proportion, there's not as much theft, a lot of the theft really happens actually internally, you know, corporate errors, all of that shrink is really what's contributing to it.

17:52It's not, it's not the image that people have in mind, which is like an individual person grabbing a body wash off a shelf. I mean, those are a drop in the bucket compared to corporate shrink that's happening. So anyway, when it comes to the actual solution, okay, like, what do you do? I mean, this isn't working, obviously, it's hurting sales, which is, of course, the last thing you want to do. But Wentworth actually said that the assets protection team is looking at, quote, creative things to do for the customer experience. And then this quote, I don't have anything magnificent to share with you today.

18:30So, you know, TBD, stay tuned. I think they put out another statement saying something similar of like, we do still have this problem, but we're trying to figure out how to fix it. But at the same time, they are still struggling with sales. And yeah, this is kind of where Walgreens is right now. It hasn't been a great couple of years. No. And we wrote a story a couple of months ago about there are a bunch of creative things to use Wentworth's parlance that they're trying. One of them, which I thought was kind of interesting, is using having, I think it's an app on your phone, if I'm not mistaken, and then using that to unlock a case so that it's like tied to a certain person, which would be interesting.

19:12But also that's a huge that requires a lot of tech infrastructure. And we're not going to get into this, but there was another big headline this week with Walgreens, which is that it implemented another big tech thing a couple of years ago with its cooler screens, smart refrigerators. And that has turned into a multi hundred million dollar fiasco and lawsuit and all these different things. So I imagine Walgreens at this current point with sales not doing as great as it wants And also having these failed technological investments doesn't want to do more tech investments that are unsure to be a clear win.

19:45And so I imagine it's in a difficult position because it would need to invest a lot of money in order to do a really creative new way to fix this problem. Yeah, especially because it is in the middle of this turnaround plan where they are also closing a lot of stores, restructuring pretty much. So they had plans to close about 1 ,200 locations. and 500 of those are set to close this year. So I think, you know, they do have, I guess, more pressing issues to deal with than that. And yeah, I think this sales issue is coming in the middle of all of that. And yeah, I mean, I guess we'll see what these creative solutions are going to be.

20:26I mean, there's other things like we've seen a lot of self-checkout going away after years of investing in that. I mean, this is just across retail in general. Well, more security guards. I think if you've been to a retailer recently, you probably noticed there are security guards pretty much everywhere watching you. And so, yeah, I think it's become this hostile shopping experience. And obviously, they're seeing that in the results. So we'll see what kind of solutions they come up with. Let's talk about other health-related news. Because this week, like I mentioned earlier, the FDA made a few announcements.

21:06I guess it's the beginning of the year, so this is sort of when they set their agenda. But the first big one that came out right out the gate was red dye number three that is being officially banned. This has been a big point of contention the last few years. So, yeah, people seem excited about that. And then the other proposal right now is improving product labels, which is basically just being creating more clarity around what is actually in a specific product that you're picking up. Yeah. So under this new rule, food manufacturers will basically be required to display like levels of certain things like saturated fat, sodium, added sugar on the front of the package.

21:52It's kind of like pseudo European, right? I feel like. in the way that it's happening. And so this will help create more ingredient transparency, because if you're an American grocery shop, or you're very familiar with seemingly healthy claims on a lot of packages, like you pick up the bottle of orange juice, and it'll say it's a vitamin source, and it's all natural. But obviously, we know that juices contain a lot of sugars. So the idea is that this will just have a big prominent label that will help you make a better decision for your health on at least, you know, while you're grabbing things in the store.

22:30Yeah, no, I mean, it's interesting that it takes so long for the FDA. I don't know, like there are a lot of different things. I'm sure there are a lot of lobbying groups saying one thing or saying the other, but making it easier for you to understand what is the actual nutritional value of it beyond the, you know, that one thing in the back, which, you know, probably a lot of Americans know how to read, but also takes a little time makes sense. And so I do think the timing is certainly interesting with the Trump administration coming in and the whole Make America Healthy movement that is undergirding that.

23:02And so I think, you know, I'm not sure that this move is politically motivated, but it also seems like this type of thing would be welcomed from those backers as well. Rebecca Buckner, who's the FDA's Associate Deputy Director for Human Food Policy, she told reporters on a call that we believe food should be a vehicle for wellness not a contributor of chronic disease. And like you said, I mean, I think one thing about the FDA is like, yes, they do move very slow. I mean, red dye has been out of cosmetics, for example, for decades now, but for some reason, you know, it has stayed in food. But the big finding right now they found is that it caused cancer in rats.

23:42So that's really what pushed the decision through. But as far as this new label policy, I think if that goes through, it will start to pop up on labels as early as 2028. So yeah, I mean, I guess it sounds like a lot of changes are coming. I was taken aback a little bit, because even though I've, we've been talking about, you know, these proposals for a few years now, it does seem like there's finally sort of like a turning of the wheels happening. And then the red dye ban companies have until January 2027. And then I I think drug makers have an additional year, which I found kind of interesting.

24:20That isn't. Does drug makers need the red dye? I don't know. I think the long time coming thing is - Looks like in NyQuil and stuff, you know, that's all. I guess that's true. I mean, put beet juice. I don't know. I don't know anything. Don't listen to me. But I don't know. The red dye thing has been decades. As you mentioned, the cosmetics. But this is outing my upbringing. I grew up with very health-conscious parents in New England. I think I've told you this story, Gabby, in the past. But like, I have distinct memories of being in the 90s. And my mother would take out the red M &Ms because of what she'd read about red dye number three.

24:54And so the fact that it has taken however many decades later, for the FDA to follow suit, I think it just is wild that like, it took this long, but also that's happening right now, you know? Yeah. Funny you mentioned M &Ms, because I, you know, the big thing was that like, oh, well, all of these big CPG players are gonna have to reformulate. But like, first of all, they already have done that because that this is already what they offer in Europe, which is what I mentioned earlier, or other markets, I should say. So they already have the formulas, but these are actually already coming to shelf.

25:27Like for example, Keurig Dr. Pepper, which owns Yoohoo's strawberry drink, you know, the famous pink one, said that their new formula, you know, of course, you know, the old one had Red Dye 3. The new one is going to hit shelves later this year. And then Pop-Tarts are also being reformulated. Calanova, the owner, said that it's working to ensure any impacted products are in compliance by the deadline in 2027. So, you know, one push comes to shove. Of course, the companies are going to figure it out. Yeah. And I imagine they have been waiting for this to come to pass for years. Whereas if you are a major CPG conglomerate that was caught flat footed with this type of change and don't know how to find new products, that's really on you.

26:11You know what I mean? And I think your European point is exactly right, where a lot of these things that the FDA is doing now have been in other countries for years. And so they likely do know how to make these products in a different way that would be in compliance. Yeah. The biggest difference is going to be that like the fruit loops in America are just more vibrant and they're going to, you know, just become a little bit less vibrant than they were with the natural coloring. So it's not the end of the world. But like you said, I'm sure there are a lot of factors involved that took, you know, made it take this long.