Supplier business strategies to offset the impact of retail bankruptcies


Even before the COVID-19 pandemic rocked the retail industry, the industry was on the ropes for a variety of reasons – mostly related to how and where shoppers shop.

As a result, the retail business has experienced more than 85 bankruptcies since 2015, according to data from CB Insights. When the pandemic hit, two dozen more retailers filed for Chapter 11 as consumers settled into ‘lockdown’ mode, shopping online only for bare necessities as they weathered the outbreak.

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While stores reopened earlier this summer, there was not enough foot traffic to support many retail brands – and more companies have filed for bankruptcy.

For secured lenders of failed businesses, there’s a good chance they’ll get some, if not all, of their money back as the business reorganizes. For unsecured debts such as money owed to a vendor, that’s another story. If the supplier is large enough, it is possible for the parties to negotiate an agreement and new terms, especially if that brand or retailer depends on that supplier to generate sales.

For small suppliers and vendors as well as contract workers, it is highly likely that they will never be paid in full or even in part, which could lead these small businesses to their own failure. But there are tactics and business strategies that could help mitigate some of the risk and protect a business. First, industry experts say “knowledge is power,” noting that it is important to understand the broader market context and the macroeconomic forces that influence consumer behavior and sales. Second, it is essential to take advantage of various financial tools to help mitigate risk. And third, industry experts are urging small businesses to “know the retailer” and fully understand their balance sheet and financial health.

As for the larger context, examination of retailers and brands that filed for bankruptcy last month revealed data showing the impact of the coronavirus on businesses as stores were forced to close. . For example, G-Star Inc.’s main unsecured debt was with its lease obligations and landlords. For Ascena Retail Holdings Inc., which listed total liabilities estimated between $ 1 billion and $ 10 billion, the largest unsecured creditor was Simon Properties Group with $ 31.6 million, followed by Brookfield Properties with $ 16.6 million. dollars, then Boston Properties Ltd. with a tab valued at $ 8.8. million.

But most of Ascena’s unsecured credit was on commercial debt. And many suppliers have been affected, as the retailer said in its court record that the estimated total number of unsecured creditors was “over 100,000.”

John Doyle, managing director of Deloitte Financial Advisory Services LLP, told WWD that with “all the uncertainty in the market, vendors and providers must manage service and relationships while emphasizing their financial health and their level of debt “.

“There are many technical strategies ranging from matching value received to value shipped, debt settlements, and prudent management of aging and delinquent receivables,” Doyle explained. “Relationships are important and teams need to be honest and transparent about payment needs, payment schedule, etc. “

Besides retailers closing their stores, financial markets also create additional pressure on sellers and suppliers. And this is leading companies to tap into financial instruments to help reduce risk.

“As a result of the many announced personal bankruptcies, credit markets are undergoing dramatic changes and many have had to severely restrict their coverage, causing a vacuum in this niche market,” said Michael Stanley, CEO of Rosenthal & Rosenthal. WWD. “This tightening of the credit market has triggered an upsurge in factoring requests. It’s an age-old financial model, but right now it’s an invaluable tool for businesses as it provides vendors with many of the immediate solutions they need, like larger lines of credit and corporate finance. working capital against receivables to support extended terms or late payments from retailers.

Stanley said that in the current environment, “factoring is one of the best business deals and it is a very viable solution for suppliers as it allows them to mitigate risk and get the best deal. credit possible in a very difficult market “.

An industry source from a leading research firm that works with both suppliers and retailers told WWD that “the challenge for suppliers is that they are paying money to source. , manufacture and deliver before being paid themselves “.

“In today’s environment, there are a number of ways for suppliers to better protect themselves, although there is of course never any guarantee,” the source said. “First of all, know your retailers, know their balance sheets. If you’re risk averse, diversify. If you are worried about doing business with a retailer that could declare bankruptcy, wait until the filing is complete before working with them. If you work with them while they are on the verge of bankruptcy, you will get pennies for every dollar, if they file a complaint. If you wait until after, you’ll get dollar for dollar, although it may take a while to recover. “

The source also suggested that suppliers “consider shortening payment terms, making payments in smaller increments, or even getting cash on delivery.” Even better if you can get prepaid. Where possible, deal with essential retailers. Finally, create a direct-to-consumer sales strategy. And if you weren’t thinking about working with Amazon, say a year ago, it’s time to think about working with them now.

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