When I lived near Oakridge Mall back in 2008, I frequently visited Sears to buy their discounted mittens and sweaters, and Toys r us in Lansdowne for Christmas gifts. Fast-forward to 2017, it is heart-breaking to see Canadian retail brands that shaped my childhood file for bankruptcy. Why are these Canadian retail companies filing for bankruptcy in 2017? The root of the cause lies in the Accounting and Business Model Canvas of these companies.

Retail stores on street-sides and malls are known as Brick and Mortar shops. When comparing different retail brands, there are three things that they follow in delivering their value proposition. According to Michael Porter’s Competitive Strategy, they either focus on cost advantage, differentiation, or focus. Examining the model of Sears, it aims to have an advantage in cost, but loses out in this battle compared to its counterparts such as Walmart. Toys r us aims to differentiate by offering a wide variety of toys, but Amazon beats it in variety of toys and provide toys at a lower cost. No specific advantages in value proposition hinders Toys r us and Sears’ revenue stream, contributing to the bankruptcy of these brands.

Furthermore, accounting issues also contribute to the bankruptcy of these companies. Canadian companies follow the International Financial Reporting Standards (IFRS), while companies in the US follow Generally Accepted Accounting Principles. One flaw in the IFRS is that it allows overvaluing of company property, plant, and equipment based on managerial estimates. One example is management can value a company property at $100 million in the future, while it might be sold at only $50 million in the future. This flaw causes a façade in the financial forecast of the company due to overvaluation. Based on IFRS, Sears was a healthy company even with negative net income , but the bankrupt clearly shows their inherent accounting flaws.

What is the solution to the decline of these retail brands? The brands who utilizes strong value proposition of cost or differentiation, and the channel it offers to customers. It is curious to note that Oakridge Mall is now filled with high end retail brands, while near Lansdowne there are three dollar stores and expanding. Dollarama reports a 4-year growth in net income, more than 10% a year.  Nordstrom  focuses on differentiation like Toys r us, has 6 stores in Canada and still expanding. Nordstrom plans to open new stores that offers no merchandise, only online shopping. This new effective online shopping and distribution channels combined forms a new business model called Click and Mortar.

New business model with quality value proposition and good accounting is the future of retail stores, and is what Toys r us and Sears lacks at.

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References image:

https://securecdn.pymnts.com/wp-content/uploads/2016/11/Is-there-an-empty-store-crisis.jpg

 

References Sites:

http://www.investopedia.com/terms/b/brickandmortar.asp

http://www.vnseameo.org/ndbmai/CS.pdf

http://www.ifrs.org/issued-standards/list-of-standards/ias-16-property-plant-and-equipment/

https://amigobulls.com/stocks/SRSC/income-statement/annual

http://quotes.wsj.com/CA/DOL/financials/annual/income-statement

http://www.npr.org/sections/thetwo-way/2017/09/11/550119193/nordstrom-tries-out-a-new-store-that-doesn-t-stock-clothes

http://www.investopedia.com/terms/c/click_and_mortar.asp

I imagine myself racing against Usain Bolt in a 100-meter race after watching him win in the 2016 Rio Olympics. The sad news is, Usain Bolt will probably win 100% of the time. When I check the financial news describing the recent quote of Nasdaq, a similar race is happening in the stock market with millions of traders participating, with the majority losing their race getting their trade orders to the stock exchange when racing against the accounts of Big Bank traders. The magic behind this phenomenon is called High Frequency Trading (HFT), a concept that some trades get to the stock exchanges faster than majority of trades because of wiring the right route to the stock exchange servers. The proliferation of HFT is causing investors billions of dollars every year, and raises the ethical issues of unfairness and government intervention.

I hate it when during a classroom discussion, I finally write down an idea and is about to talk about it when a fellow peer peeks at my paper and blurts out the idea to the whole class. HTF method “electronic front-running”, parallels this situation, the Big Bank traders can see what stocks their clients want to buy, and rush in.

Why can’t the government stop these unethical practices that these Big bank traders are initiating? The answer no lies in dark pools, “private exchanges created by banks that did not have to report real time what trading activities took place within them”.

Referring to the class discussion, it is also hard to justify government intervention into the free market with only a niche group of people earning these profits.

To eradicate the unethical practices of HTF, Brad Katsuyama, a former RBC trader, created the Investor’s Exchange (IEX) that is both profitable and fair. He provides a platform for all traders to trade at equal speed, at a commission price of nine-one hundredth of a cent per share. Brad making money off the commission from IEX helps himself, but also the fairness of Wall Street; contributing to the idea “collectivist ends can be attained without collectivist means”.

Many big banks also start to use IEX. This is an example of these firms respecting the stakeholder theory. The stakeholder theory is the idea that the different groups affiliated with a business is important to the contribution of overall success of the business.  While utilising dark pools will bring profits to the industry, the blame it gets from the community in a financial crisis will far outweigh the benefits.

Statistics from IEX shows from January to July 2017, it has generated an average of $6.1 billion trades a day; proving fairness and good ethics can turn into profit.

 

Word Count:

447

Sources:

Word:

Lewis, M. (2014). The Wolf Hunters of Wall Street Web. Retrieved from

https://www.nytimes.com/2014/04/06/magazine/flash-boys-michael-lewis.html

The Economist Group Limited (2016). Speed bumps in the night. Retrieved from

https://www.economist.com/news/finance-and-economics/21701137-american-regulators-approve-controversial-new-stock-exchange-speed-bumps

Friedman M. (2007). The Social Responsibility of Business Is to Increase Its profits. In: Zimmerli W.C., Holzinger M., Richter K. (eds). Corporate Ethics and Corporate Governance (pp 173-178) Springer, Berlin, Heidelberg.

Pictures:

http://www.marketwatch.com/story/on-its-first-anniversary-as-a-stock-market-exchange-iex-draws-both-critics-and-praise-2017-09-05

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