Brands and suppliers are facing a credit insurance crisis due to the banking meltdown. Will a supplier shake-out follow?
Suppliers to a raft of multiple retailers including JJB Sports, Woolworths and some chains within the Baugur investment portfolio have had their credit insurance on the companies pulled in recent weeks, leaving them with the difficult decision of whether or not to supply uninsured, or to pull back from risk but take a significant hit on their own sales. Added to that they must manage the headache of diverting stock and orders already in the production process.
One boss of a large supply group says that he takes informed decisions about when to get insured. “We don’t insure in the UK but we do insure overseas customers,” he says. “Because we are very close to the UK market we feel that we can decide our own limits here.” However, he says that reduction in cover is a really big issue for other suppliers. “They will have to decide whether to take a risk on customers or risk losing that business. It’s not easy and by January or February next year there will be a lot of shake out in the supply market from those who get burned by retailers failing,” he points out.
The footwear market is one of the worst affected supply sub-sectors. One footwear supplier told Drapers that he is unable to get credit insurance on any of his footwear specialist multiple customers, which he says is due to the collapse of a few high-profile retailers.
The recent pre-pack administration of Faith and collapse of Dolcis and Stead & Simpson earlier in the year caused ripple effects which impacted on the entire footwear market. The footwear supplier says: “Although insurers monitor company by company, they also assess sectors across the board and take an overall view. At the moment footwear looks a really high risk.”
The supplier says his independent customers are less exposed than multiples to insurer concerns over the footwear sector. He says: “The amounts with independents are so small that these do not seem as risky. Still, around 25% of my orders with indies can’t get cover so we’re working on solutions with each account. I would not say that number of accounts is particularly higher than last year though.”
Young fashion brands are also feeling the strain. Earlier this year, Henleys said it was slashing its account base by 25%. It attributed the strategy partly to being unable to secure insurance on orders against some of its stockists and new customers, so opted to sacrifice some sales to safeguard its own health.
At the time a source close to Henleys told Drapers that the company could not afford to take a chance with businesses that had not proved themselves. “Henleys is losing credit insurance on a lot of accounts and it is a pre-requisite, especially if there is no sales history,” he said. “It is still working with the good accounts but some will fall by the wayside, like the poor payers. It is good to keep reviewing the business. I don’t think that Henleys is being unreasonable.”
In recent weeks insurance is understood to have been pulled from a number of young fashion multiples and independents, making it difficult for brands to juggle their order books and know which factories to commit to. Nick Madlani, credit manager for young fashion brands Modern Amusement and Luke 1977, says that insurers have become much more nervous, forcing him to pay more attention to customers’ credit issues. “I am checking the insurance situation almost by the minute,” he says. “Insurers are incredibly nervous and the slightest hint of any of our customers being out of joint means they pull back cover. Any business that has any association with Iceland is being affected significantly.”
Madlani sympathises with retailers which he says are being hit by the double whammy of nervous insurance companies and landlords becoming stricter, but says he has to become more vigilant in terms of who he supplies. “I’m talking to our customers regularly and a lot of them are very depressed,” he says. “Rents are going up and there is no leniency at all from landlords. But when the rent goes up, the first thing these retailers do is hold back payment to the suppliers they deal with.”
He claims that retailers are also using the revenue generated by sell-out brands to pay other suppliers. “Come January and February I can see a lot of companies going under. It’s going to be survival of the fittest. This is the third recession that I have experienced and this is the scariest one. “Last week a very large well-known independent had its overdraft removed by the bank. The owner immediately stopped all cheques as a result. We are revising orders all the time and I am pressurising the sales team to get the order book updated so I can get payment plan letters out there.”
Mark Ashton, UK agent for young fashion brand Ichi, says that the problems that even well-established and high-profile businesses have had means that there is no certainty for many suppliers. “Everything looks like a gamble until you actually receive a payment,” he says. “There are some big accounts losing their limits as the economy takes a knock.”
However, he adds that his brand is also seeing benefits from the credit crunch: “On the flip side of this we are taking extra business as value and margin is becoming vital for the retailer,” he says. “We’ve had a lot of concession enquiries from companies who, in effect, want us to do the buy and run the system for them.”
One young fashion independent says that tightening of insurance cover is creating a cycle which means retailers get caught up in a spiral of increasing costs and challenges to cash flow.
“Half of it isn’t necessary, it’s just nervousness,” he says. “Insurance companies do not really understand what’s going on with the financial crisis – like a lot of people – and they are making decisions based on fear and headlines. It’s understandable I suppose, but while they are being cautious they are crippling businesses. There are signs that landlords are also getting nervous. Since the government changed the rules on rates on empty units, landlords will be suffering. That makes them less likely to be tolerant with a business that may need a little leeway on rent.”
Madlani also says that the whole process of forward ordering could become a big casualty of the crisis. “Suppliers will not be far from being cash and carry businesses as retailers increasingly look to buy stock when they have cash in the business,” he says. “That would really hurt suppliers because they rely on forward order because of their commitments to factories.”
Madlani adds that suppliers should be persistent with insurers, saying that an initial pulled credit decision can be reversed if suppliers are prepared to battle it out and do some legwork. “In a tough economic climate the consensus is that the onus is on the brand to push the insurer for cover. Insurers can be made to revise their decision or look again at some companies if they have strong payment records. Also, if a business can get post-dated checks or weekly or regular payments coming in from retailers, then insurers will review the situation.”
Madlani says that he does a weekly “stop list” which everyone in the business sees, followed by updates throughout the week if any accounts need to be put on hold.
He says: “To survive the impact of these cutbacks by insurance companies, brands need to have a very good credit control process in place, and they also need to be able to communicate the situation throughout the business, with information shared between sales teams and credit control departments.”
15%: The increased risk of retailers being unable to pay suppliers this year
28%: The rise in administrations of fashion retailers in the first half of 2008
40: The number of fashion and cosmetics businesses that fell into administration in the first half of 2008
Sources: Euler Hermes, Deloitte