Analysis: Has time run out for Forever 21?

Forever 21 was the American teen’s shop of choice in the early noughties. With the latest trends at pocket money-friendly prices, the store was a staple of malls across the US.

However, the fashion brand, which was founded by South Korean immigrants Do Won Chang and Jin Sook Chang in 1984 with just $11,000 of savings, is now facing potential bankruptcy as it failed to keep up with the intense competition in young fashion and adapt to the digital age.

The retailer is reportedly preparing to file for Chapter 11 bankruptcy – the American equivalent of a CVA – imminently. 

What went wrong?

Gilbert Harrison, chair of investment firm Harrison Group and chair emeritus of Financo, says Forever 21 “built a great brand but did not change as the consumer changed”.

The chain rose to prominence as its low priced fashions struck a chord with thrifty teens and it became a staple of American malls.

However, the arena has become increasingly crowded with the likes of H&M and Zara expanding in its US heartland and discount stores such as Walmart and Target upping their fashion offering.

“It’s not resonating with its core customer base. They started in 1984 and the world’s changed a lot since then”

Maureen Hinton, GlobalData

GlobalData research director Maureen Hinton says Forever 21 has lost its appeal when faced with this much stronger competition.

“It’s been opening stores but losing sales every year. I think it’s fairly obvious over the last few years that it’s not resonating with its core customer base. They started in 1984 and the world’s changed a lot since then,” she says.

Retailers such as H&M and Zara have upped their fashion credentials and are also offering sustainable options for today’s more ethically minded young shoppers.

Forever 21 is not the only young fashion chain that has fallen out of favour. Claire’s, PacSun and Aeropostale have all filed for bankruptcy in recent years.

The shift to online shopping has also undoubtedly hit these retailers as online players such as Asos, Boohoo and even Amazon stole market share. While other bricks-and-mortar retailers having invested in cutting-edge websites in recent years, Forever 21’s digital offer remains clunky and pales in comparison to pureplay rivals.

The growth of online has also led many US chains to shutter stores. Investment bank UBS, which predicts that online sales penetration will rise from 16% to 25% by 2026, believes 21,000 out of the US’ 82,000 clothing stores will have to close.

Despite these structural changes, Forever 21, which has more than 800 stores worldwide, including 500 in the US, was still talking of expansion as recently as 2016. Its website still boasts about its expansion ambitions: “With a goal to become an $8bn company by 2017 and open 600 stores in the next three years, it’ll be exciting to see the company achieve in three years what it initially took 30 years to do.”

Many of Forever 21’s US stores are in malls, which have been particularly hard hit as fewer shoppers visit these locations.

Harrison says Forever 21 has also suffered as it “built stores that were too big and the rents hurt them”. The average Forever 21 store is 38,000 sq ft, while the largest is around 162,000 sq ft.

Meanwhile, debt at the retailer continued to spiral and negotiations with its lenders to restructure it stalled.

Ill-fated UK expansion

Forever 21 has also expanded outside of its core US market and has stores across North and South America, Asia and Europe. This includes the UK where it launched to great fanfare in 2010.

When it opened its first store on Oxford Street – a shop it paid £13.7m to previous owner HMV to nab – chief executive at the time Larry Meyer told Retail Week Forever 21 would open shops in “every major city, every mall and every high street” within five years.

He seemed true to his word as a clutch of new stores opened in quick succession but just three of these stores remain after outlets in Glasgow, Bluewater, Dublin, Westfield Stratford, Intu Trafford Centre and Intu Lakeside closed.

“Forever 21 focused on opening stores in shopping centres or in big-box formats. Shopping centres have, however, been suffering from a decline in footfall in the UK for the past two years, according to BRC figures,” says Mintel fashion analyst Chana Baram.

“When Forever 21 first arrived in the UK in 2010, the competitor landscape was very different: fast fashion pureplay retailers were not as big a threat”

Chana Baram, Mintel

Meanwhile, it faced stiff competition from other young fashion retailers in the UK, including value giant Primark and a growing array of online retailers.

“When Forever 21 first arrived in the UK in 2010, the competitor landscape was very different: fast fashion pureplay retailers were not as big a threat, with Asos, Boohoo and Missguided far less ubiquitous. Shopping habits, particularly of Forever 21’s target audience of young millennials and Gen Zs, have changed and it has struggled to keep up,” Baram says.

Retail analyst Richard Hyman points out it is not the first American retailer to get it so wrong in the UK and is not surprised by the Chapter 11 news. “It’s been a slowly evolving car crash,” he says.

”The overwhelming majority of American retailers that have come to the UK have failed and Forever 21 is an extreme example of the flawed thinking that made failure 100% certain. The trouble is they come here and hire local lawyers and hire real estate advisers, but they think they know the retail bit themselves and it almost always ends in tears.

“They’re not going into Chapter 11 because they came to the UK, although I don’t think the UK has helped – the losses they made here must have been quite spectacular.

“If you can get that bit of your business so spectacularly wrong you’re bound to get other parts of your business closer to home spectacularly wrong.”

Hinton points out that the UK market is different to Forever 21’s US homeland: “It is far costlier in the UK to run a store than it is in the States and because it’s such a concentrated market, you’re much closer to the competition. It’s far more competitive.”

What happens next?

Filing for Chapter 11 bankruptcy gives Forever 21 a “chance to get rid of its unprofitable stores and cut overhead costs”, says Baram.

“If this is filed, it will then have 120 days to set out a plan to reorganise its business. In order to get the business back on track, lenders would have to be willing to pump more money into it and this could be a hard sell. Only time will tell what will happen, but these are certainly troubling times for the fast-fashion retailer,” Baram says.

Hyman agrees. “Chapter 11 doesn’t mean it’s dead, it means it’s not viable and will now be put on life support.”

Hinton suggests Forever 21 could use the Chapter 11 bankruptcy to trim its store estate and continue to trade from a smaller number of locations much like the department store chain Sears has done.

This means its ill-fated UK foray may come to an end.

“Forever 21 was already reviewing its UK and Ireland store estate having struggled to break into the market and in the last few years,” says Baram. “We can see that it had already started to rethink its shopping centre strategy, with just one of its three remaining UK stores located in a shopping centre.”

“However, one of its other remaining stores is on London’s Oxford Street and has suffered from one of the largest West End business rates increases, with rates reportedly going up by 71% between 2016/17 and 2018/19.

“This kind of fee will be difficult for a struggling retailer to justify keeping the store open,” she explains.

However, closing unprofitable stores does not solve all of Forever 21’s problems. The retailer will face a battle to make its business stand out in the crowd of young fashion retailers. 

“One of the main things it needs to do is understand its customer and produce a product they’re going to buy,” Hinton explains. “A lot of retailers forget it’s all about product really. If you haven’t got a product people want to buy, you’re going to be fighting on price.”

The retailer’s brand is all about being forever relevant for trendy young shoppers. Chapter 11 may give it a second shot at achieving its aim of eternal fashion appeal.