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Suppliers’ Dilemma: Partner With Distressed Retailers Or Go Into Battle?

This year has seen an unprecedented number of retail store closures and many apparel businesses, in particular, have teetered on the brink of disaster, with some falling over the edge. And behind every distressed retailer are suppliers, vendors, creditors and landlords whose fates are tied to each successful turnaround and failed restructuring attempt. How these parties react when stores are facing challenges depends on a lot of factors, including the stores’ future prospects as well as their past interactions.

Just last week, Bloomberg reported that Bon-Ton suppliers are pulling back, following news last month that the retailer had hired PJT Partners to help refinance its debt and prepare for a potential bankruptcy.

Undisclosed sources said skittish Bon-Ton suppliers are demanding letters of credit or COD terms. While a spokesperson for the retailer calls its relationships with vendors “constructive,” there’s no question that timing couldn’t be worse with the holidays approaching.

The department store’s story is similar to the issues Toys “R” Us faced recently, which led the toy store to file for bankruptcy. The move allowed it to secure DIP financing, which served to put suppliers at ease.

Bon-Ton and Toys “R” Us are far from the only retailers faced with increasingly nervous suppliers—just the latest.

And in a way, the number of retailers facing challenging situations could be helping tip the scales in their favor as suppliers decide if they’ll let them implode or throw them a lifeline. While the reaction might have been the former in times past, these days, suppliers may be more willing to do the latter—but the change of heart isn’t altruistic. “Suppliers have a vested interest to make sure they have ample channels to sell product,” said Mark Belford, managing director of corporate finance at KPMG. “It’s self preservation.”

That doesn’t mean suppliers are completely rolling over, Belford said. Rather, they’re trying to be constructive rather than combative.

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Their stance, he said, will be at least partly reliant on their stature. “The larger the vendor and the less concentrated the risk they have with one retailer, the more lenient they can be,” he said. “They know that if they go under, it’s unfortunate but it’s not game over.”

Peter Maerevoet, global CFO for DS Concept, agreed larger companies are typically committed to hanging in there through a retailer’s ups and downs. Prior to joining DS Concept, which offers factoring, purchase order finance and credit insurance protection, he was at Levi’s, where both the denim brand and its retail partners looked out for one another.

“Smaller vendors may be less willing or they don’t have that long-term perspective to help out,” he said. “They’d rather be secure that the cash comes in in the next couple of months [or sell] to go to more reliable partners.”

Though walking is an option, vendors can’t be cavalier about abandoning a retailer in a tough spot since their livelihoods are likely intertwined. “If you’re a supplier, and Sears makes up a chunk of your sales, for instance, you can’t just stop shipping Sears. Where are you going to sell your goods? How are you going to make payroll?” Belford asked.

Courses of action

Vendors looking to cover themselves have quite a few options, according to John Stillwaggon, CEO of DS Concept’s U.S. operations. They might dramatically reduce terms from 45 days to as few as 15, request prepayment or a deposit, limit their sales volume or—as seen in the Bon-Ton case—they could ask for letters of credit.

They could also opt to work with a factor, which puts a different type of pressure on a retailer, according to Belford. “Factors help provide liquidity and information,” he said. “The retailer knows the factoring entity is factoring for other suppliers, and if they’re late with payment, it will have a ripple effect because they’ll let other vendors know payments are coming in late.”

Suppliers might also get insurance to protect against getting caught empty handed if a retailer goes under. Though, as has been illustrated with some working with Sears, that can prove to be an expensive solution. “The insurance you could get on Sears peaked at 4 to 5 percent a month, which if you’re selling on 60 day terms, it eats a significant amount, maybe half of your margin,” Stillwaggon said. “Some vendors see it as a strategy because they’re making some money or [because] when the retailer turns around, they’re thinking that they’ll be there as one of the heroes.”

In the case of those suppliers that are able to be flexible and believe the chain is viable, Maerevoet said, he has seen them extend payments out by as many as five months—but not for nothing. “In return, they want more long-term commitments, saying after you get through this period, we want to make sure we’re your No. 1 supplier or you’ll take this amount of volume guaranteed every year at this price,” he said. “They don’t do it for charity.”

While there’s plenty of number crunching that goes into determining which retailers to rescue, other factors come into play as well.

Earlier this year, Sears Holdings CEO Edward Lampert cried foul when he said suppliers were unfairly targeting the retailer and attempting to take advantage of its compromised state.

Lampert’s combative tone on the company’s blog and subsequent lawsuit against the supplier are unlikely to have endeared the retailer to its other vendors.

Suppliers definitely consider their previous track record with a retailer before determining future actions, Maerevoet said. And sometimes suppliers’ reactions are a case of chickens coming home to roost, he said.

“It depends how did Sears treated its suppliers when things were still going well. If they decided to go for strategic relationships and not negotiate every penny and make life hard for suppliers, those suppliers would be more willing to help now,” he said. “If they played hardball in the past, then suppliers will play hardball.”

The relationship aspect is one that’s even more important in some parts of the world, Maerevoet continued.

“How long have you worked together? How much do you know each other? How much do you trust each other? It’s not a quantitative measure but its very important in our world, and certainly when you’re dealing with vendors in South East Asia and China. A lot of it is built on relationship and mutual trust,” Maerevoet said, adding transparency is imperative. Suppliers do not react well to surprises.

Ultimately, Belford said, suppliers, landlords and creditors look at one thing when determining how to react to a retailer’s dire straits: “If the retailer were to close its doors tomorrow and go out of business, other than those directly impacted, would anyone care?” he posed. “There are strong brands in every vertical that are known for a particular product and have brand equity that, should they run into a financial situation that puts them in a bad spot, those are the first that people will want to be helpful to.”