Some high-profile retailers are coming to vendors with hat in hand after a less-than-happy holiday.
“Retailers are back to where they are telling vendors ‘You have to help,’ and the vendors are complaining,” said one credit analyst at a credit-checking firm.
Merchants, this person said, are demanding “bigger” discounts than any in recent memory while some seem to be playing a “game and asking for more than they expect to get.” Retailers and vendors often settle on a smaller sum than what the merchant initially wanted.
This time, retailers aren’t just demanding markdown money to make up for lost profits. Some are trying to strong-arm their “partners” into waiting twice or three times as long to see any payment hit their bank accounts.
Markdown money, chargebacks, and other forms of putting the squeeze on suppliers are an industry practice long considered a retail “profit center.” When merchandise doesn’t sell for the price that vendors and merchants hashed out up front, retailers often look for ways to recoup those losses. That’s when they try to get suppliers to cough up the difference—the negotiated sale amount minus the price the item actually sold at—so merchants can walk away with their margins in good shape.
Most vendors see this long-running trick-of-the-trade as simply the cost of doing business, unsavory as it might be. Retailers even put the screws to vendors back in 2020 during the early covid fallout, although most merchants were careful not to go overboard. Things were never better between retailers and the companies that supply their merchandise than in 2021, when merchants were desperate to land anything they could get their hands on for customers enthusiastically spending after months in lockdown. But what now seems to be a fluke of full-price sales that year quickly crumbled in 2022 when even retailers such as Walmart ditched billions of dollars worth of orders on top of slashing prices on what they had on hand.
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And now that a ho-hum holiday season is in the rearview mirror, merchants and vendors are locked in “heavy” negotiations, the credit analyst said, blaming last year’s second-quarter industry-wide inventory meltdown for triggering this mess. Markdown money requests began in earnest in Q3 and haven’t let up. Making matters even worse, Saks and Hudson’s Bay Co. (HBC) are now looking for 60- to 90-day payment terms instead of the usual 30, this person said.
Executives at Saks and HBC didn’t respond to a request for comment.
“Saks was very promotional and broke price earlier than normal by about one week,” said Gary Wassner, CEO of Hilldun Factors, which focuses on the luxury market and works with several top designer brands.
These days, markdown money depends on the brand, Wassner said. “Arrangements have been made between many brands and vendors for upfront discounts instead,” he added, also citing the raft of retailers similarly asking for up to 90 days to pay invoices, versus the once-standard 30.
Wassner said his clients weren’t in the line of fire the way some bigger vendors were, mostly because he’s advised them all year long on how much to produce and ship to retail customers. And since many designer brands also ship fewer units, they mostly dodged the misfortune of large “vendors who saw their orders cut by 10 to 30 percent as retailers bought less to right-size their inventory,” he said.
A factor at a large firm also called out Saks as one of the retailers begging for markdown money, saying the overbuying bug bit every corner of the luxury department store. The source said he hadn’t heard of any “extraordinary” markdown requests at other retailers, though these asks usually happen on a case-by-case basis. Many of this factor’s clients also sell to Macy’s Inc., which has recently started negotiating for discounts up front.
“Since the pandemic, we have materially reduced markdown allowances and made a strong pivot to an upfront cost negotiation model [and] changed how we incentivize merchants so bonuses are based on Macy’s, Inc. sales versus functional responsibilities,” CEO Jeff Gennette told investors earlier this month.
The retailer credits analytics investments for driving stronger sell-through, Gennette said.
Once everything started unraveling on the consumer spending front last year, Macy’s “bought closer to need, held open-to-buy reserves, and bought into areas of strength,” he said. “We were measured with promotions and markdowns and did not chase unprofitable sales.”
That doesn’t mean Macy’s didn’t ask for any markdown money, just at smaller discounts than it would have in the past.
The chairman of a fashion company selling men’s and women’s sportswear, who asked to remain anonymous for fear of jeopardizing his retail accounts, said he’s resigned to these markdown money requests rolling in when a season wraps, even when retailers report booming quarterly sales. “Retailers are always asking for more money,” said this source, who doesn’t expect things to change anytime soon.
In fact, despite retailers using AI to boost profits, financial sources said they expect markdown allowances will remain a fixture in the industry for years to come. “Consumer behavior is unpredictable,” a credit source said. “Retailers will always look to vendors eventually for some [financial] help.”
MMG founder and senior managing partner Alan Ellinger agreed that “vendor-supported markdown money is here to stay.”
“I don’t think that the problem has gotten any worse,” he said. “I do think that vendors and brands have learned to manage the cause of the much-needed markdown margin support better. I know a lot of our clients have gotten more aggressive in managing what the stores are buying so that they’re not putting too many goods on the floor to curtail the need for margin support later.”
And while upfront price negotiations build in some form of discounting, Ellinger said retailers sometimes return for a second bite at the apple. But more vendors are willing to stand their ground and dismiss any further discount demands, he said.
There seems to be one key to steering clear of those markdowns asks, or at least the biggest ones: make it onto a retailer’s Top 20 or 30 vendor list. “It’s harder for those at the mid-tier level,” one financial source said.