The recent Chapter 11 bankruptcy filing by fast-fashion giant Forever 21—its second in just six years—offers business leaders a sobering case study in recognizing when a business model is faltering. On March 16, 2025, according to Reuters, the company announced it would liquidate approximately 350 U.S. stores after failing to find a buyer, marking the end of an iconic brand that once dominated shopping malls nationwide.
While retail-specific challenges contributed to Forever 21’s downfall, the underlying warning signs apply to businesses in virtually any industry. By examining these signals closely, entrepreneurs can detect similar vulnerabilities before reaching a crisis point.
3 business model mistakes to avoid
1. Digital transformation resistance
Forever 21’s collapse illustrates the devastating consequences of failing to adapt to digital disruption. As CFO Brad Sell acknowledged per the outlet, competition from foreign e-commerce players like Shein and Temu significantly undermined the company’s market position. These online rivals leveraged technology to create more efficient operations and better customer experiences—advantages Forever 21 couldn’t match with its primarily brick-and-mortar approach.
Warning signs to monitor:
- Declining customer acquisition through traditional channels
- Technology investments that consistently underperform
- Customer feedback indicating your digital experience lags behind competitors
If your business continues operating with outdated systems while competitors embrace digital transformation, you’re likely following Forever 21’s trajectory.
2. Misreading changing customer preferences
Forever 21’s inability to evolve with shifting consumer behaviors represents another critical failure. The brand’s original value proposition—trendy styles at affordable prices—became less compelling as consumers increasingly prioritized sustainability, online shopping convenience and personalized experiences.
Warning signs to monitor:
- Gradual sales declines across core product lines
- Increasing customer acquisition costs with declining lifetime value
- Competitors gaining market share with alternative approaches
Examine your fundamental underlying assumptions—especially the core reason you believe customers will spend money on your offerings—and consider whether they remain valid. Economic changes and technological developments can rapidly transform consumer behaviors.
3. Unsustainable cost structures
Forever 21’s massive physical footprint—once a competitive advantage—became an unbearable financial burden as mall traffic declined. The company maintained hundreds of large-format stores, each carrying significant overhead costs that couldn’t be justified by decreasing revenues.
Warning signs to monitor:
- Profit and cash flow growth not keeping pace with revenue growth
- Consistently extending payment terms with suppliers
- Cash flow problems despite seemingly healthy sales
An unsustainable cost structure can sink even well-established businesses that have strong brand messaging and loyal customers.
Taking action: Your business stress test
Rather than waiting for a crisis, proactively evaluate your business using these steps:
- Digital readiness assessment: Compare your digital capabilities against both direct competitors and potential market disruptors.
- Customer value analysis: Conduct deep research into evolving customer priorities beyond satisfaction surveys.
- Financial flexibility test: Assess your company’s ability to quickly adjust its cost structure during market downturns. Identify which expenses could be reduced or eliminated if needed, and determine how quickly you could implement such changes.
Most businesses don’t collapse suddenly—instead, they gradually decline over an extended period before leadership finally acknowledges defeat. By recognizing these warning signs early, business leaders can take corrective action while options remain available.
Photo by Colleen Michaels/Shutterstock
