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Crunch time for credit

As consumer spending dives on the back of the credit squeeze, wholesalers and suppliers are also starting to feel the pinch.

The market may have been buzzing with optimism at streetwear show Bread & Butter in Barcelona last month, but there is a serious undercurrent about how the US credit crunch will affect the fashion industry beyond consumer spending this year.

In an attempt to limit their own exposure, credit insurers are already reigning in credit limits available to suppliers to cover retailer orders in the event of non-payment. Meanwhile, many brands have found themselves up to their eyeballs with stock they cannot deliver or clear because of credit issues and retailers falling into administration.

It is almost impossible to estimate how much insurers have pulled back funds – the insurance companies contacted by Drapers did not return calls – but the cutbacks are already serious enough to prompt a huge increase in workload within most suppliers’ finance departments.

In layman’s terms, the cutbacks mean insurers are slashing the value of retailer orders they are prepared to cover and in some cases insurers are refusing to give any cover. This leaves brands in a quandary as to whether to cut back individual orders and damage their own top line, or even whether they can risk supplying some customers at all.

This has prompted a near-crisis in the supply market, which is weighing heavy on both independent retailers and their brand partners. The issue goes beyond those retailers struggling to pay their bills and includes stores that historically have been consistent bill payers. This is largely because of the caution surrounding the sector after the collapse in high street fashion sales over Christmas.

Nick Madlani, credit manager for young fashion brands Modern Amusement and Luke, says the credit crunch has already filtered down in a significant way and that some retailers may not be able to get hold of the stock levels they need to turn a profit. He says: “Consumers will continue to be cautious until mortgage rates come down, and this means insurance companies are very cautious. Independents are going bust at a rate of one a week at the moment. You have to be vigilant all the time. I am checking my insurance ratings online every 10 minutes because of the situation.”

Madlani says his insurer trimmed back cover on one high-profile retailer’s order by £15,000 this season, despite its history of paying balances on time. He says: “I called the insurer to ask why they had reduced it – they said the company profits were down slightly on the previous year and they were worried the business was exposed somewhere else. They are basing decisions on any small thing they see at Companies House.” He added that he has also encountered difficulties with opening new accounts, which ups the pressure on brands in the current climate.

For suppliers the issues are clear cut. Do you force independents to pull back orders and watch your sales slow, or do you risk it and “self-insure”, taking a chance that the retailer will survive long enough to pay for the goods.

The managing director of one young streetwear brand insists that credit issues are no more of a problem than 12 months ago, but adds that he is prepared to back some retailers, even if there are concerns about their credit history. He says: “I wouldn’t take stupid risks on orders, but I have the support from my company to take risks if I believe it is the right thing to do.”

Ringspun sales director Richard Gilks says he also has confidence in his customers. “We regularly visit our stockists’ stores because we are out selling eight men’s collections a year, so we get a good measure of how they are trading,” he says.

The alternative is to offer customers payment plans, which insurers are more comfortable with protecting. Gilks is offering this service to selected customers this season. “With new accounts, we are doing more checks and we are putting payment plans in place for those with problems,” he says.

Gilks adds that Ringspun’s payment plans give customers more time to play with beyond the usual 30-day credit limit. On an order of £5,000, his customers would pay about a third up front, with the remaining balance spread over a longer period.

Similarly, Madlani says about half of his customers – the majority of his independent customer base – are on payment plans, which are structured to ease cash flow difficulties. He says a £5,000 order does not require any payment up front, with customers instead making payments every week for eight weeks after delivery.

Madlani also recommends contacting the administration department of the insurer directly and asking retailers to provide payment history if necessary. “Where they have initially rejected an account, you can talk to the insurer and sometimes persuade them to give you a little discretionary insurance. Once you have that you at least have something to work from with the customer, which can build a credit history for the future.”

Aside from credit insurance issues, brands are also experiencing difficulties with independents attempting to pay for goods by company credit card. One supplier says: “A lot of independent customers pay by credit card, but they are now having their limits reduced and their terms shortened from the average 56 days. This is causing problems for us too.”

However, independents with credit available on their plastic are often using it positively to pay pro-forma for goods on order, according to Madlani. “This works, but the insurer still knows how you are paying for the goods. However, it may give them a bit more confidence.”
Another supplier says he shares information about new accounts with a circle of brands in the industry. He says: “I had a new account this week and rang my group of labels. I found out it was on stop with two of them but the retailer paid pro-forma on a credit card to secure the goods, which means I’m protected and can deliver.”

With credit so tight, more and more indies are putting the majority of their buying budget aside for in-season product, meaning the credit crisis is playing into the hands of short-order and stock house brands. However, these suppliers are not immune from the effects either.
The managing director of one short-order label said he was drawing down account history for stockists before every appointment this season and setting strict order budgets – a painful process given that several were below last year’s order levels. “We can be in an appointment totting up as we go and we have to stop the customer and tell them to pare their order back. Although they’re giving us more of their budget, which is great, we can’t afford to expose ourselves either,” he says.

Pan Philippou, managing director of WDT, which owns streetwear brands Firetrap and Fullcircle, agrees it is imperative to control order levels to minimise risk. He says: “The UK is quite a mature market and we know who our customers are and can work with them. At the same time we don’t want them to over-buy, but nor do we want them to under-buy either.”

However, suppliers agree that if your product is strong and sell-throughs are high, then as a business you are more protected from credit issues because retailers often opt to pay you as priority to ensure future supply and therefore future cash in the till. Alan Strang, managing director of Action Apparel, which owns young fashion brand Chilli Pepper, says: “It’s never been tougher to get your money as a supplier, and debtor days are getting longer. I don’t remember anything like this in my 25 years in the industry. But the most effective credit control is to make sure your product sells out, then you are more likely to be paid as a priority.”

Madlani says brands that fail to manage their accounts closely with the credit crunch in mind are exposing themselves to serious risks. However, he advises that a successful brand should leverage its position to ensure it comes first in the queue for payment.

“Because our brands are selling well, people will dig into their pockets, and strong brands that shout the loudest will get their money,” he says. “We can capitalise on good sales and push for 30-day payment. However, if a brand isn’t selling well, it will be forced to extend terms, putting it in a riskier position.”

For retailers, insurance issues could put them in a catch-22 situation. Without sufficient stock or the right stock from the right suppliers, they cannot generate enough cash to survive. Without enough cash they cannot pay suppliers, sending them into a dangerous downward spiral.
Strang says the answer is to talk to brands. “We can be far more supportive of anyone struggling with cash flow if they talk to us. We have to have realistic payment plans, but we have worked with people,” he says.

Madlani agrees. “I ring my customers every day to see how things are. Anything can affect cash flow – if car parking is cut back in their shopping centre, for example – and as long as there is a dialogue we can do something to help them.”

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