Extended payment terms by retailers and brands are putting pressure on distributors, who could struggle to stay in business if they don’t adapt to the changing landscape.
Retailers and brands have for some years faced growing pressure on their cash flow, with more than an unlucky few going under. Now this is trickling down to other businesses that rely on them to survive.
Distributors are struggling to ensure they have enough working capital in their businesses to make them viable, as more and more retailers extend their payment terms.
The current model means distributors pay for all, or a hefty majority, of the stock upfront, before going on to sell to retailers. In order to turn a profit, the stock must be sold to retailers at as close to full price as possible. In comparison, agents simply take a cut of whatever they sell after the event. The upside is that distributors can make more - netting as much as 30% to 35%, according to one brand - where agents take home around 10%.
As a result, distributors have large sums of cash tied up in product that may not sell for many months - if at all.
But payment terms are creeping up - several, including in the last month one major European etailer, have extended payment terms to 90 days - leaving some distributors wondering if they can survive in the current climate.
“It’s becoming increasingly hard,” says Terry Pearman, director of Neat Distribution, responsible for US brands including The Original Retro Brand and The Rising Sun. “The biggest pressure for a distributor is that of working capital.” The impact is beginning to be felt.
Shortly before Christmas, Blustocking, the distributor of women’s young fashion brands Little Mistress and Lipsy, registered as insolvent. It is understood the company will go into liquidation imminently, but further details are not yet known.
And this isn’t the first distributor to struggle. Mark Husted, sales director of footwear brand Base London, says more distributors are having to make use of companies offering bridging loans to improve cash flow, while others are cutting back on all but the essentials. “Our US distributor had to make the difficult decision to cut back on trade shows as it was just proving too expensive for him,” he adds.
Dan Gyves, director of footwear distributor Vendere Distribution, agrees. “In the past, when retailers paid on 30-day terms, it wasn’t so much of an issue. But now some retailers have increased their payment terms to as much as 120 days, which could effectively be more like 180 to 200 days if you pay for stock as soon as it leaves the factory,” he says.
“I don’t necessarily blame the retailers,” says Graeme Nichol, sales director of 33 Joints, which distributes Feud London, Rubber Duck and Blowfish Malibu in the UK and Europe.
“Everyone is being squeezed at the moment and retailers, particularly independents, simply don’t have enough cash in the bank to pay for goods as soon as they receive them.”
So is there a solution? Factoring companies, which will lend money to distributors based on the goods they have sold to retailers, to tide them over while they await payment, are becoming a popular choice.
But, as Gyves explains, this eats into a distributor’s profit margin, making the risk-reward pay-off less tempting.
Pearman says he prefers to try to rely on open dialogue between the different parties involved at all times.
“You need to work with reliable suppliers and reliable retailers that understand your situation,” he says.
“If a retailer has an issue paying you then they need to be honest and upfront about it so you are aware of what’s going on, and the same goes if you have an issue paying a supplier.”
Another alternative adopted by some distributors, including Gyves, to cope with the shortfall is to adopt a mixture of the agency and distribution models. “You can use some of the cash gained through selling brands as an agent to fund your business as a distributor,” Gyves explains.
However, in the case of Blustocking, other factors were at work. Although no one from the company was available to comment, those in the industry tell Drapers the final straw was probably when Lipsy - one of the biggest brands it distributed - was bought by Next.
Paul Turner-Mitchell, owner of Rochdale young fashion indie 25 Ten Boutique, says: “Lipsy was a great brand that was bought by lots of young fashion retailers in the past but when it was bought by Next, indies didn’t want to buy it any more.
“Blustocking couldn’t sell the volumes of product in the same way after that.”
Nichol also argues that the distribution model falls down when British distributors attempt to represent brands solely in the UK. “If you can buy directly from the brand in the UK then you would do,” he says. “Going through a distributor is pointless as you would have a lot more choice of product if you went to the brand direct.”
Pearman adds: “If a distributor has any sense then he needs to distribute the brand in multiple markets. It’s about economies of scale and you will make far more selling a niche brand across seven different markets than you would in just one.”
If a UK brand is looking to sell its products overseas though, the distribution model may well be the
“A distributor spread across several regions has superior knowledge of local fashion differences,” explains Nichol. “If we take Blowfish as an example, the collection we sell in Germany is about 60% to 70% different to our UK range.”
Nichol, who is also sales director for young fashion footwear brand Feud London, says the distribution model remains compelling only when accessing new or distant territories.
“As a brand we will sacrifice a certain amount of our profit to a local distributor to make sure we get paid,” adds Nichol.
Despite uncertainty surrounding cash flow, the distribution model still seems to be the preferred choice for those looking for the best returns.
“There are certainly lots of factors to consider,” says Gyves. “But that said, if you do it well you still stand to succeed.”
“Is the distribution model still viable?” asks Nichol. “Despite the economic climate, it remains the most commercially used form of transaction for fashion brand management internationally and that just isn’t going to go away.”
Story in Numbers
- 35% Average maximum amount of profit a distributor can make on what they sell
- 70% Maximum difference in the collection distributed by Blowfish Malibu in Germany versus the UK
- 200 Maximum number of days a distributor could spend in debt waiting for payment from a retailer
- £159k Amount Blustocking had owing to creditors in the year to June 30, 2011