On Monday, May 6, 2013, Oreck Corporation, a 50 year-old manufacturer of high-quality vacuum cleaners, filed chapter 11 bankruptcy in the Middle District of Tennessee. In its voluntary petition, Oreck disclosed assets between $10 and $50 million and liabilities in the same range (although at closer examination, it appears the debt is between $10 and $20 million). Oreck employs over 600 individuals in its Cookeville, Tennessee factory, national retail stores and Nashville corporate headquarters.
The Company filed bankruptcy with an intent to sell its business as a going concern. Section 363 of the Bankruptcy Code allows a debtor-in-possession such as Oreck to sell substantially all of its assets, provided certain conditions are met. Among other things:
- a debtor must give notice of the sale to all creditors and parties in interest;
- the bankruptcy court must offer an opportunity for a hearing to approve the sale;
- sale proceeds must be used to satisfy the claims of secured creditors, and secured creditors are even afforded an opportunity to bid their secured claims towards the sale price;
- the bankruptcy court generally requires a debtor to conduct an auction, open to all qualified bidders (in order to adequately verify the highest value in the market place is obtained); and
- the bankruptcy court generally approves, ahead of time, procedures setting forth the criteria for qualifying bidders and how the auction process must proceed.
It does not appear that Oreck has substantial debt obligations. In connection with a request to enter into an $11 million post-petition financing facility, the Company disclosed that it owes Wells Fargo Bank approximately $5 million or less (from an original $20 million prepetition facility) and a group of lenders lead by Broadpoint Products Corp. approximately $5.5 million. The new financing facility will pay, in full, the secured debt owed to Wells Fargo and will provide Oreck with an additional $6 million in revolving credit to fund operating expenses and restructuring costs, as necessary.
The top 20 creditors holding the largest amount of unsecured debt are owed approximately $2.5 million. There may be additional obligations later disclosed in Oreck’s bankruptcy schedules, but such obligations are not expected to be significant.
Loss of Market Share
In 2012, Oreck held about 4% of the $2.3 billion upright vacuum cleaner market. Seventy percent of the Company’s revenues come from selling and repairing vacuums through direct sales and its 325 specialty stores nationwide. Since 2010, Oreck’s sales have been declining, due in large part to an increase in the competition in the vacuum market and a decline in direct sales at its specialty stores.
Even before filing bankruptcy, the Company took several efforts over the years to reinvent itself and restructure. In 2007, the Company moved its manufacturing plant to Cookeville, Tennessee and shortly after moved its headquarters from New Orleans to Nashville, Tennessee. Oreck appointed a new CEO, Doug Cahill, in 2010, and has almost an entirely different staff. Earlier this year, Mr. Cahill expressed the mood of the Company. He said “we feel like a 50 year old start up.”
In February of this year, the Company revealed a more-detailed explanation of why, even though its brand is well-known, it has lost a significant percentage of the market in upright vacuums (its core business). First, its direct sales model was not working, as less consumers were calling Oreck directly or visiting its specialty stores and instead were relying on major retailers, like Walmart, and the internet (both of which are more accessible). To address this flaw, the Company intends to start selling its products through these popular retailers and move away from its direct sales model.
Second, the Company did not move into the bagless vacuum market fast enough, even 10 years after Britain’s James Dyson introduced this popular product line in the United States. To address this problem, Oreck is introducing its new bagless product line, which includes vacuums and vacuum/steam mop hybrids.
Third, Oreck did not modernize its advertising and marketing strategies. Instead, it relied too long on infomercials, which primarily targeted late night television viewers. The Company is now advertising in the day during popular television programs.
Finally, Oreck waited too long to modernize the look of its vacuums. For many years, Oreck’s designs were boxy and out of date. More recently, the Company has introduced sleeker, more modern models.
Unfortunately, in March 2013, Mr. Cahill resigned as Oreck’s CEO, stating that his vision for growing the Company was not shared by Oreck’s primary shareholders. Shortly afterwards, Oreck decided to file bankruptcy. The Company is now in need of a new leader to either continue Mr. Cahill’s efforts to reinvent Oreck or take the Company in a different direction. Through the chapter 11 filing, the hope remains that this well-known, American manufacturer can find a buyer to lead the Company in the right direction. And, one need not look very far for great examples (i.e., Texas Rangers bankruptcy) of how bankruptcy can be used to successfully accomplish such a goal. Thus, everyone should expect Oreck to be in the World Series next year.
- How Oreck got into this mess (bizjournals.com)
- Oreck: Bankruptcy Filed, Buyer Sought (webpronews.com)
- Oreck Corp. files for bankruptcy protection (coralvillecourier.typepad.com)
- The Oreck VersaVac™ wins Innovation Award at Housewares Design Awards (prweb.com)