Everybody Needs a Balance Sheet; Notes from the Conference Retailer Panel

It’s not that this group of retailers, speaking at the Transworld Industry Conference in Banff, was wrong in the comments they made about how suppliers work with them. God knows I wouldn’t want to be a snowboard retailer and, in the words of one participant, it may indeed be a good year if you manage to pay your bills and spend 100 days on the hill.

 Among the things retailers said they needed were better margins, more thoughtful distribution from suppliers, support for stores that hold prices longer, discretion in managing warranties, better communications, and complete orders shipped on time. Judging from the comments after the session ended, had it been a supplier panel, the suppliers would have spent the whole session complaining about not getting paid on time.
“Nobody’s right, when everybody’s wrong,” somebody sang a long time ago. In this case, everybody’s right, but it doesn’t seem to matter. I asked the first question when the session ended: “Is there anything the suppliers are doing right?” I didn’t get any specific, positive answers.
Why can’t we all just get along? Suppliers should get paid on time, and retailers should get complete orders on the dates requested. It would be good for everybody and for the industry. It would even be good for the consumer. Here’s why I think it’s so hard to make it happen and a few things you might be able to do to improve the situation.
It’s the Balance Sheet
It isn’t any secret that this hasn’t been an easy industry to make money in whether you’re a manufacturer, brand, or retailer. The result is a lot of weak balance sheets. Without getting into the gory details, that makes it hard to cash flow your way through a season. From the manufacturer, to the brand, to the retailer, almost everybody needs somebody to finance them. And the cheapest source of working capital is almost always your supplier, no matter where you are on the food chain.
If your balance sheet is weak, finding that financing can be tough, or at least expensive. Often, it’s both. I have one client who, because of his weak balance sheet, had financing costs that were nearly ten percent of sales. That’s a huge number in most businesses. It’s especially big when margins aren’t that good to start with, all your business has to be done in four months, and marketing costs are high. The way you finance your business can and does make the difference between a profit and a loss. No wonder everybody tries to get the other guy to pay for it.
The bad news is that it’s sort of a zero sum game- what one side gets, the other side loses. No wonder the retailer panel had an “us against them” feel to it and was so focused on complaints by both retailers and, after the presentations, suppliers.
What can we do? I’ve got no magic wand for weak balance sheets or seasonality. But I do think there are a few things we might do to at least improve understanding between suppliers and retailers and maybe make things work a little smoother.
Are a pain in the ass for everybody, but I doubt they are going to go away. We tend to spend a lot of time negotiating what is and what is not a warranty, and how it should be managed. Retailers want total discretion, authority, and support from the supplier in managing them. Suppliers aren’t quite sure they can trust the retailers to deny an unjustifiable claim from a good customer if they know the supplier will back them up and replace the product.
How about if suppliers and retailers negotiate a warranty allowance equal to some small percentage of sales? It’s the retailer’s to use as they see fit, with the caveat that they have to return the warrantied product, or maybe just review it with the rep in the store, so the supplier can see it’s being put to good use. The bad news is that it would be a direct cost known at the beginning of the season. The good news is that if it worked right the warranty process would be reduced to an accounting entry, hopefully eliminating a good part of the hassle that goes with handling warranties. That may not be direct, visible cost like a warranty credit, but it shows up in employee time, phone calls and inventory management.
What percentage should it be? What if you, as a supplier, proposed just a bit less than what you already know it costs you to handle warranties every year anyway? Try it with just a few key accounts to start with.
Invoice Due Dates
Everybody wants to be paid early and to pay late. Me too. I have no suggestions for changing human nature, but I do think there’s a need for clarification. When I sat in the supplier’s chair, I always thought (hoped?) that if an invoice was “due” for payment January 15th, that was when I should have the money. Silly me. I have the feeling many retailers act as though that’s the date when they need to begin to consider paying the invoice.
What if you offered accounts an extra one percent discount the following season if all their payments were received by the due date? What if, with your largest accounts at least, you actually discussed what the “due date” meant and agreed on the day you’d have the money, not arbitrarily setting the due date as 120 days from invoice date, but on a date, perhaps a bit more or less than 120 days, when payment seemed to be possible and make sense.
Okay, okay, I know no agreement means anything if the retailer doesn’t have the money to pay and the supplier can’t afford another one percent discount. It’s that balance sheet thing again. Still, it couldn’t hurt to have similar expectations as to what a due date is.
With email and the internet, there’s probably no excuse for retailers and suppliers not to know what the other knows about inventory availability, shipping, and order status. Even if the message is, “We don’t know,” which is the case more often than you would think. With as much high quality, similar product as is out there, communication should be a source of competitive advantage for companies who do it well.
Retailers and suppliers can improve communication by walking a mile in each other’s shoes. A retailer might invite managers from key suppliers for a discussion about managing open to buy. Lay out a scenario where shipments come in incomplete and either later or early than what was specified. How would they merchandise with an incomplete shipment? When would they cancel and order another brand, if it’s available? What do you do when the supplier can’t tell you when it will be there?
Suppliers might request retailer’s insight into working with factories. Want the best prices? Let’s reduce the breadth of product lines and let the factory make the longest possible production runs. Oh, but you also want complete mixes in four different shipments in lots of new colors? Well, then the factory has to stop and start production so that we have some of all sizes and shapes of boots, boards, bindings, or outerwear to send you. There go the lower prices from efficient production. Unless we have them make it all really early and ship it to us. But there’s that balance sheet thing again. Who’s going to finance that inventory while it’s sitting around?
Our bank only loans us forty percent of the value of inventory, but they’ll finance seventy-five percent of current receivables, so we’d really like to ship it all to you retailers right now.
The retailer, of course, wants an exclusive territory extending 300 miles in all directions and doesn’t want anybody who discounts before Easter opened. The supplier wants to open everybody his major competitors are in and see his existing dealers increase their orders significantly every year. Retailers looking for any kind of geographic exclusivity probably need to work with smaller brands. Option, for example, has built dealer relationships that involve a certain level of exclusivity. They have decided that full price sell through and higher margins for themselves and their dealers is more important than the highest possible growth rate. At the other extreme, Burton has the market position, and advertising and promotion programs to be aggressive with distribution.
There will always be a distribution conflict between suppliers and retailers. My suggestion is that both focus not just on sales, but on gross margin dollars earned, as a way of measuring the success of their relationship with the other.
I hope that at the retailer panel at next year’s Industry Conference, the discussion can focus on what we can do better to work together, not just on what’s wrong. I also hope there’s some good snow.