Recession alters supplier-retailer payment pacts
Manufactures and retailers of seasonal products — from sweaters to outdoor equipment — face the additional challenge of timing the appropriate product with the changing weather. This combination spurred changes in payment agreements for some manufacturers, creating a situation where suppliers provide short-term financing to retailers during a slow patch.
It’s a trend one local banker noticed.
“As the economy was slowing down, the first part of the transition happened because customers were not able to pay,” said Gary Gomulinski, a vice president of Vectra Bank in Boulder and managing director of its outdoor industry division. “The first wave of manufacturer or warehouse financing was inadvertent.”
In a typical arrangement, manufactures ship products to retailers with the expectation of payment within 30 days, Gomulinski said. As the recession shook the retail sector and product sales slowed, many retailers delayed payment as they waited to turn products over, thereby creating payment delays, Gomulinski said. As sales began to rebound, credit for retailers didn’t always follow.
“Once you get past the initial (recession), some of the manufacturers started to realize their customers were having a harder time finding new lines of credit,” Gomulinski said. That’s when he noticed some of his manufacturing customers offering longer terms to their retailers, either through formal negotiation or by informally permitting payment after 30 days. In some outdoor industries, Gomulinski has seen formal terms of 120 days.
Boulder-based sweater maker Neve Designs LLC maintained traditional terms with customers, said owner and president Tom Irvine.
“But we have certainly worked closely with all our accounts to provide flexibility when it’s needed, either through credit terms or split shipments.” Irvine said. “Whatever it takes to help each other get to the other side of this extended stagnation in the economy.”
The 10-year-old company does design, management, warehousing and logistics from its Boulder location but most of the company’s production is offshore, Irvine said.
The company has its roots in the ski market, said Irvine, who goes by the adage, “Snow trumps the economy.” Warm temperatures across the globe made a poor market for folks selling winter gear, he said.
“We were impacted more by the weather than any single year during this current recession,” Irvine said. Still they’ve seen some growth in recent years.
Longmont-based manufacturer Icelandic Design Inc. took a different approach.
“We got even tighter with our accounts receivable,” said Kayes Ahmed, chief executive for Icelandic Design. “We never gave any leeway.” The company creates fashion-forward, high-end sweaters and coats, and sells to retailers such as Nordstrom and boutiques in ski resort towns. Sweater prices start at $250, Ahmed said, with most of the company’s expenditure up front during the design process and when purchasing materials. With 90 percent of Icelandic Design’s sales happening in the fall, their product becomes obsolete by January and a new season’s cycle begins, he said.
The recession shrank the business, Ahmed said, forcing him to reduce his staff by half. Sticking to 30-day terms and staying up to date with his customers has kept him in business, he said.
“We have 1,200 customers and put 400 on pre-pay basis in 2008,” he said. They also began accepting credit cards so some customers could pay up front. They reduced the amount of product they make and do a fraction of the speculation-based production they used to do. Things are coming back very slowly, Ahmed said. Federal measures, such as the recent quantitative easing announced by the Federal Reserve, do little to impact his ability to get short-term loans from local banks, he said, making inventory management even more important.
It’s a choice manufacturers must make, Gomulinski said, whether to reduce inventory and product or let products out without payment on traditional terms.
“It depends on how their product is received out in the market and how much business they are trying to generate,” Gomulinski said. “To sell, it has to be on the store shelf.”
Longer terms are old hat for some in the outdoor industry.
“In the bike industry, it hasn’t changed at all,” said Lester Binegar, general manager at University Bikes, 839 Pearl St., Boulder. Terms extending a few months out aren’t unusual, he said, and while bike sales went a bit flat in 2008 and 2009, there was an uptick in sales of parts as people fixed the equipment they had. Since then, bike sales have increased for University Bikes, something he attributes to pent-up demand and possibly as a side effect of a down economy.
“A lot of people who commute by car began to commute by bike to save money, and for some people their bike is their therapy.”
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