The internet has made many industries obsolete -- Craigslist practically wiped out classified ads -- and stationery stores, while still here, might not be as relevant as they once were.
The retail market for stationery store items in the United States is a healthy $9.5 billion industry, but that's expected to decline 2.1% in 2021. If you invest in this commercial real estate sector, find out what just happened with Paper Source, a big player in the business.
Paper Source files for bankruptcy
Chicago-based stationery and gift retailer Paper Source filed for Chapter 11 bankruptcy March 2 after gross sales were down from $153 million in 2019 to $104 million in 2020.
Appealing to crafters and people who like to visit brick-and-mortar stores to browse and shop for gifts, Paper Source is a niche business, one that was a victim of unfortunate timing.
A big acquisition just before COVID-19
Timing turned out to be terrible for Paper Source's aggressive strategy: It bought 30 stores from competitor Papyrus in early 2020 -- just a couple of weeks before a certain pandemic put much of the world on lockdown orders.
The cast of characters
To understand what happened with Paper Source, here's some background on its competitors, Papyrus and The Paper Store.
At its peak, Papyrus had 254 stores, 178 of which were in the United States. Paper Source's acquisition of 30 Papyrus stores expanded Paper Source's presence by 22% for a total of 158 stores.
Just months prior to Paper Source's March 2021 bankruptcy announcement, in July 2020, another big player in this niche market filed for bankruptcy. The Paper Store, with 86 stores in the Northeast, filed for Chapter 11 bankruptcy, unable to weather the coronavirus pandemic in the midst of shelter-in-place and social distancing orders.
Paper Source's fall
Paper Source's stores are mostly in urban and suburban shopping areas but not typically in malls. This retailer sells gift cards, journals and books, wedding invitations, party supplies, craft supplies, and bath and beauty products. Paper Source was on a growth trajectory just before COVID-19 hit.
A temporary closing of its stores in 2020 during the pandemic led to a great decline in revenue -- the store remained closed during two of its busiest times, Easter and Mother's Day. And it was never able to fully benefit from all the Papyrus locations it paid millions of dollars to obtain.
At the time of the bankruptcy filing, Paper Source had rent obligations of $15.8 million, which kept building during a time when the company was losing money. Although the store was doing well before the coronavirus, it was heavily leveraged to the tune of over $100 million, which, along with decreased revenue, turned out to be the straw that broke the camel's back.
The Millionacres bottom line
There has been a lot of upheaval in the stationery niche market, so commercial real estate investors need to be aware of that. But Paper Source has a stalking-horse bid from its lenders, which ensures the bidding can only go so low, a tactic that helps bankrupt companies. So Paper Source can possibly restructure.