Why Corporate America Will Bounce Back in 2011

2010 saw many high-profile corporate bankruptcies. But many of those corporate failures could lead to good economic news in 2011.

Borders Books, the once-demonized slayer of independent booksellers, appears headed for bankruptcy court: its stock trades at only a little more than a dollar a share and this week, the company delayed payments to vendors. Most likely, Borders will be the first well-known company to file for court protection in 2011. A look at the company’s ills and the other major corporate swoons of 2010, however, portends a strong 2011 recovery.

Here’s why: A dynamic, well-functioning economy “churns” firms in all sorts of economic conditions. As an economy recovers or even thrives, firms that have failed to keep up with the times can go under as other, faster, better competitors realize economies of scale, exploit technological advantages, or achieve branding successes. Storied  hardware retailer Hechinger’s—a D.C. area institution—failed at the height of the 1990s expansion. Once-respected computer makers like Zeos, Swan, and AST went under just as people started logging onto the internet in large numbers. The first major dial-up computer service, Compuserve, sold out to AOL just as the internet economy began to thrive. Good economic times, in short, can be very bad for companies that let major trends pass them by.

The severe recession in 2009, however, saw an entirely different type of corporate failure. Many of the companies that went under dealt in products that people more-or-less need (cars, financial services), operated in segments with high barriers to entry (have $1 billion to start an auto factory?), or were in businesses (casino gambling) that many had believed were “recession proof.” Nearly all of the troubled companies made mistakes but, in a better economy, even real laggards like Chrysler probably could have stayed above water.

Although 2010 was hardly a benign year for business (the number of bank failures approached S&L crisis records), the highest profile failures took place at companies that were clearly behind the times. Now bankrupt Blockbuster video, the once-dominant video chain, has had its market taken away by on-demand, vending machine and internet/mail order video services.  A&P, a once-dominant grocer that has been in decline for years (when’s the last time you saw a store or shopped at one?), failed because competition from all sides—Trader Joes’, Whole Foods, Costco, Wal-Mart, Harris Teeter—left it with unappealing stores patronized by an older customer base. Movie studio MGM failed despite a record year for movies largely because of its own mismanagement. Other companies with serious 2010 troubles include newspaper owner Tribune Corporation (which, yes, filed for bankruptcy at the tail end of 2009) were also in industries that have clearly passed their prime.  These failures, painful for employees and stockholders, open up new opportunities for businesses that fill once empty niches: Redbox, Netflix and dozens of other streaming services will grow as Blockbuster closes its doors, a failure of Borders will create new opportunities in the fast-growing e-reader marketplace. And so forth.

Corporate failures aren’t always bad. And the list of those that happened in 2010 actually promises good things for 2011.