The companies that are listed as bankrupt today were once globally recognized and had an honorable place in their respective industries. Although some of these companies do not exist any longer, they are standing tall as an open book of financial lessons people must learn to protect themselves from falling into the misery of bankruptcy.
Most of the billionaires who have gone bankrupt in the past have revealed ‘bad investments’ to be the major reason behind their failure. Several other business icons have lost their wealth following stock market losses, illegal activities, and frauds. Among these investors, some have regained their wealth while several others have failed to get everything they had once.
As the world is coping with the pandemic, the registered insolvencies around the world also have increased to a considerable number. In 2021 alone, the UK’s Insolvency Statistics has shown a 22% increase than the previous year.
So, besides the pandemic what financial mistakes can cause companies and individuals to go bankrupt? Here is the answer. Today’s blog will inform you about all the financial lessons we have learned from companies and individuals who have declared themselves broke.
Financial Lessons From 5 Major Bankruptcies Of The World
Number One: Sears – Once The Biggest Retailer Of The World
Sears, the retail giant which filed for bankruptcy in the year 2018, was the only company in the US having sales equivalent to 1% of the country’s entire economy. In the late ’60s and early 70s, the company remained the largest retailer in the world, and around two-thirds of the US shoppers relied on it.
The company emerged as the most prominent retailer following its merger with Kmart in the year 2005. The merger proved to be a worthy deal in its initial years, enabling both the companies to earn a revenue of $55 billion.
Just two decades after its boom period, the company’s sales started declining. In the year 2018, the company filed bankruptcy following its mounting debts and declining revenues. The company was acquired by one of its shareholders Edward Lampert for just $5.2 billion.
The retail giant that once had over 3000 stores worldwide now has a total of 182 stores. But what caused the downfall of this mighty retailer? Here are the expert-revealed reasons that led Sears towards bankruptcy.
- The reason why Sears broke was “It stopped working on innovation”. In the initial years of its commencement the company took even the slightest of threats seriously and came up with strategies to overcome these threats. Thus, it kept prospering for four decades but later it stopped thinking of any further innovations resulting in its failure.
- The company missed several investment and sustainability opportunities.
- It lost the focus it once had and didn’t cope with the competitive threats.
Lesson 1: Never stop innovating; if you do so, you are paving your path towards bankruptcy.
Number Two: Toys R Us – The iconic US Toy Brand
Toys R Us, the legendary US toy company was established in the year 1948. In the early days, the company started its operations with a single store that mainly dealt with cribs and strollers. Soon after it started operating the Toys R Us Company became one of the biggest toy retailers.
The company later expanded its operations and started offering bikes and electronics as well. In the year 2009, the company also acquired one of its prominent competitors FAO Schwarz.
Toys R Us reigned the toy industry with its 1,600 stores worldwide for more than seven decades. But later in the year 2017, the company decided to file for bankruptcy following its soaring debts.
The biggest reason for the company’s downfall was its high prices. Companies like Amazon, Walmart, and Target enabled the users to get lower-priced products thus, Toys R Us lost its majority market share.
Lesson 2: The competitive pricing strategy is an important factor that helps companies to retain their market share and customer count.
Number Three: Solyndra – The Hyped-Solar Panel Company
Despite being among the top 50 most innovative companies and having funds worth $535 million in federal loan guarantees, the Solyndra Company filed for bankruptcy in the year 2011.
Solyndra, Silicon Valley’s darling company has also received over $700 million in venture capital funding. Despite having enough resources the company even failed to survive a single decade.
Just after 6 years of its operations, the company had raised over $783.8 million in debt. Thus, in the year 2011, the company laid off over 1100 of its employees. According to the experts
According to the financial experts, the reason why this company bankrupt was, its costs were too high while their rival companies in China were providing similar products at much lower prices.
Another reason for its failure was, the company itself was a risky venture while the majority of its initial capital was funded with debt. Later, its customers also were paying for the panels at a discounted price, thus it couldn’t amass enough revenue.
Lesson 3: Assess the risk attached to the idea you are going to pursue. If it’s a risky venture, financing it with debt might not be a good idea.
Number Four: Modell’s – The Leading Sporting Goods Retailer
Just recently in the year 2020, one of the leading Sporting Goods Retailer filed for bankruptcy succumbing to the challenging retail environment.
The retail company started its operations in the year 1889 from the northeast USA. For more than a century the company remained one of the leading sporting goods dealers until the Corona Pandemic.
Talking about the reason why they faced bankruptcy, Modell’s CEO revealed that the company was overburdened by debts and its sales were also declining.
Another reason for the bankruptcy of Modell’s was they were facing tough competition from their competitors like Amazon.
The company initially announced to shut down a few of its stores and later it decided to end its journey by shutting down all its stores while only its online stores will be functional. This way the journey of the oldest sports goods Retail Company came to an end.
Lesson 4: Keep a check on your competitors and their strategies else you will lag behind.
Number Five: J.C. Penny – A Century-Old Go-To Family Retailer
Founded in 1902, J.C. Penny was the most experienced and reliable family retailer that dealt with a variety of products from homewares to fashion. The company kept flourishing until the late 1990s and soon it started weighing down with debts.
After its commencement in the year 1902, James Penney combined a chain of around 34 stores and merged them with J.C. Penny. By 1928, the company proved to be the first one-stop shop that provided a variety of products to its customers. The idea of a one-stop-shop actually emerged from here.
In the late 1920s, the company emerged as a huge retailer having over 1000 stores. Following this, the company kept booming and it amassed revenue of $1 billion while its sales peaked at $20.4 billion in the year 1994.
In the year 2016, the company revealed that they have started facing sale cuts thus their revenue has also started to decline. To keep the situation under control the company closed some of its stores and it was left with around 850 stores.
Later, when the world was hit by the pandemic, the company lost more of its sales thus it decided to further lessen its store footprints.
Finally in February 2020, after 118 years of business, the company decided to file Chapter 11 bankruptcy.
Lesson 5: Get ready for all possible scenarios. Anticipating problems will help cut off the worst-case scenarios your business is likely to face.
You may also want to read: Best Advice From Warren Buffett Regarding Credit Card Debts
The Takeaway Points
The most common financial mistakes that lead companies towards bankruptcy include:
- Companies do not reconsider their pricing strategies.
- They stop bringing innovation.
- They do not consider and assess the risks attached to starting a venture.
- They never understand the fact that it is essential to keep a check on their competitors’ strategies.
