Friday, March 20, 2009

A squeeze around the middle

Sometimes a squeeze around the middle is a nice thing. I personally like it when my husband or kids come up and give me a hug. But when the squeeze is put on me in a business sense, not so much.

One of my loyal readers asked in the comments of another post how credit terms had changed for some of the retailers recently. Interesting question, and one that I have spent some time working on recently. In the interest of full disclosure, I'm discussing this from an outside perspective. I've not worked in the credit area of a supplier or in the buying organization for a retailer... but I know people who have and/or do.

Under normal times retailers (we're talking big retailers here, not the mom & pops) order goods from a supplier. The supplier produces the goods and when they ship they bill. Terms differ, but are usually net 30, net 45, something like that. The retailers usually negotiate additional other terms they want such as markdown allowances, etc.

From what I'm hearing on multiple fronts, the retailers are getting more than a little bit bolder on the terms that they're demanding. They're not only asking for higher allowances, but they're also extending out their payments. In fact, numerous retailers are actually highlighting their accounts payable as a percentage of inventories on their earnings calls. Additionally, for goods shipped from overseas historically the retailer was said to have possession of the goods when they shipped, so the time on the ocean counted in the payment terms. That just got changed by a number of large retailers recently.

Suppliers have a few ways to fight back. Some retailers are obviously cash strapped, and that's taken into account by the credit managers at the suppliers when orders are placed. I'm hearing that credit terms are especially strict these days. Credit managers are pouring through financials, trying to make sure that they're not taking on too much risk. As one friend put it, "Just because you're a big company doesn't mean you can't go bankrupt on me." I know of one particularly fiesty credit manager who refused to sell to a certain large retailer because they were asking for ridiculous terms. The line "you have to sell to us because we're _______" doesn't hold much weight right now. Also, JP Morgan (and others, I'm sure) have developed some financial hedging products to allow suppliers to protect themselves against the potential bankruptcy of retailers with whom they do business.

Cheery, no?

1 comment:

cooldude007ca said...

Thank you so much... I enjoy this blog for the questions it asks as well as for the answers it provides.

Dylan