With the UK economy still in the doldrums and the eurozone crisis unsettling banks and businesses, independent designers are shouldering more than their share of financial risk.
Last week the Bank of England revealed more bad news for the economy: its growth forecast for 2012 has been revised to zero, down from 1.25% three months ago. Using the Olympics as an analogy, governor Mervyn King noted that the country was unlikely to return to “full fitness” before 2014.
“As I have said many times, the recovery and rebalancing of our economy will be a long, slow process,” he said. “It is to our Olympic team that we should look for inspiration. They have shown us the importance of total commitment when trying to achieve a goal that may lie some years ahead.”
One of the main factors cited for the UK’s slow return to growth is the eurozone crisis, which this week took a step closer to recession, revealing economic decline during the second quarter of 0.2%, and even in the fashion world it is starting to make an impact.
Independent designers – chiefly those working in high-quality materials such as leather – are finding that factories in Spain, Italy and Portugal have started demanding a higher proportion of payment upfront as their domestic banks avoid anything even nominally risky.
One designer told Drapers the final straw came in May. “Overnight, one of the factories we work with in Italy started asking for 30% cash before they’d made a single shoe, with the rest on delivery, as they were having problems with their bank,” she says. “Previously, we’d always been able to pay 14 days after the goods landed in the UK. That came out of the blue, so we had real problems and our bank was no help at all.”
Coming on the back of years of increasing financial pressure, for some businesses there is no slack left to bridge the gap. Anil Stocker co-founded website MarketInvoice last year to meet the rising demand for businesses to access short-term capital. The site allows small businesses to auction off unpaid invoices in order to raise capital more quickly.
As British banks have become more bearish, Stocker’s platform – attracting institutional investors with a greater appetite for risk “at the right return” – has seen more than £22m raised for businesses across a variety of industries.
In particular there has been “rapid growth” from the fashion industry using his company as a way of funding the shortfall and enabling them to fulfil their orders. For those who are accepted, a decent chunk of their earnings will go to the investor who stepped into the breach, but Stocker says designers are “willing to give a couple of grand back” in order to get the garments made.
It is not only the eurozone crisis that is keeping designers awake at night. Retailers have been extending their terms since the economic crisis was first rumbling in 2008, and since the start of this year pressure has intensified again.
In many instances retailers have doubled, or even trebled, their payment dates. Designers spoken to by Drapers estimate that standard terms are now 60 to 90 days, although it can go up to 120 days, up from 30 days four years ago.
“It has been a big problem for us,” says one. “There are some businesses we can’t deal with because terms are so long – anything over 90 days is a real struggle to service,” says another.
Some retailers have introduced a net term policy, a move that Stocker dubs “sneaky”, which adds up to another month to the point when payment is promised. This has caught several designers out.
“It was a big shock [when it first happened] but we learned from it,” says one, who admits the only reason she survived was because the business had cash buffers.“I hear from people at shows that others – especially young designers – make that mistake all the time.
She adds: “Retailers are businesses, so it makes sense for them to hang on to cash as long as you can, but I wish they were more upfront about terms. No one minds a 75-day term if you’re told it’s a 75-day term.”
The British Footwear Association’s chief executive Richard Kottler says his members have experienced widespread increases in terms over the past two to three years, coupled with an increase in discounts.
“There’s no doubt that the majority are being asked to wait for 90 days, and in most cases have to put up with fairly hefty settlement discount terms,” he says.
In some instances these terms have been applied retrospectively, adding more stress to a business’s bottom line.
And Kottler notes that the ongoing issues around credit insurance have been taking their toll. “It’s the double whammy of payment terms being extended and discounts being demanded at short notice, underlined by the lack of insurance,” he says.
Although it has been “quite stressful” for many – and with no improvement in sight, will continue to be so – Kottler believes his members have adapted to the situation sufficiently well.
Brands have increasingly had to take on responsibilities typically reserved for bigger businesses – currency management, for example, or carrying out credit checks on retail customers.
“At shows like Micam, you will have people taking orders saying: ‘The good news is we have 10 orders, but the bad news is that six of them are from Greece,’” he says. “We’re certainly not opening the champagne every time an order is taken.”
With the wider economy set to remain in the doldrums for at least another couple of years, it is now a matter of survival of the fittest.
Kottler believes designers must “chase around the world” for alternative suppliers, avoiding both inflation in Asia and the risks of the eurozone. “If they do that, their business should be sustainable,” he says.
Brands at the coalface highlight the need for better business acumen. “As an industry we could do more to educate people about business,” says one. “I meet people who come straight out of fashion school and have no idea about how to actually get a product into a shop, or to pay for having things made.”
Stocker agrees that most of the companies he sees in trouble are run by those who “just aren’t business people”. While terms are continuing to be extended, he believes at least one solution lies in standing up for yourself.
“It all comes down to the power in the relationship, but where possible suppliers really should push back on any changes to terms,” he says. “Sadly we’re in a climate where small businesses need that work, so they will bend over backwards a bit too much to get it.”
Story in Numbers
0.2% - Dip in eurozone economies in Q2 (April to June) compared with Q1
€110bn - Amount allotted as emergency loan for Spanish banks back in June
0% - Bank of England’s growth prediction for 2012
2.6% - UK inflation in July
2014 - Year the UK will return to “full fitness”, according to Mervyn King