Sell through guarantees?

To those of you selling to chains and department stores, how common are requests for sell through guarantees? I’m just curious how many of you are approached by buyers who ask for them and whether there’s any wiggle room. Also, what percentages do they ask for? I’ve heard some buyers want 85%, is that standard? Then, I’m wondering how pilferage plays into the mix. If products are shoplifted on a sell through guarantee, who takes the bite? One would think it’d be the retailer since they had it last but in these days of shrinking allowances and increasing chargebacks, one should assume nothing.

And speaking of chargebacks, you may recall that Federated acquired May department stores. From a story in WWD yesterday, at a meeting in April, Federated announced they were treating the May stores as “new doors” and were planning to exact a 5% “new store allowance” from vendors (in the echelons of department store retailing, buyers are known to request an allowance from vendors to offset the costs of opening a new store and stocking it from scratch). Suppliers are saying this fee is unwarranted because -in taking over the May stores- the switchover doesn’t amount to much more than a nameplate change.

Since many vendors affected by the allowance were already selling to both Federated and May, the changing of the nameplate doesn’t necessarily add new doors to the vendors’ business. In some cases, the closures of certain May doors may have even reduced the overall business for some vendors…

One Seventh Avenue apparel executive who has lived through several past retail mergers observed, “This is the first time I’ve seen it,” referring to Federated’s store allowance. The executive added that the way Federated is defining “new door is not the concept that most people” would understand, based on past industry practices.

I watch retail consolidation coupled with consumer defection at all time highs and can only think this is good news for independent designers and retailers -or it just me? Either way, file this under “Yet another reason why you don’t want to sell to department stores”.

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6 comments

  1. big Irv says:

    I really feel sorry for some of the former employees of the MAY Co. Once the acquistiton was in place, I know some MAY people that were literally put out onto the street, deemed redundant and not sharing common values with Federated and their idealistic retail views.
    It is such a shame that a company with such a rich history in retail were acquired just for their physical locations and nothing else.

  2. Sherry says:

    This is timely. Yesterday I went exploring for independent retailers. (I live in NYC.) I went into some boutiques and shops that have been around for a long time, but into which I never entered. Yesterday, I figured, “What the heck?”

    I’ve found that although I may not like individual stores, I like shopping in the smaller stores much, much, much better than the large department stores. There were several stores that I have gone into over the past few months that I will go to first when I have money to spend, even though they do not have the quantities and varieties that I anticipate. There is one in particular where I want to spend my money, simply because I would feel good spending my money there.

    Here’s the problem. There are too few independent retailers. That has a huge effect on independent DE’s. The retail leasing costs in NYC are hurting the big guys. Imagine what those costs are doing to the existing independents and anyone hoping to open a new store.

    Also, many of the independent retailers sell the same similar styles, made by the same small group of DE’s, to similar target customers in the same (relatively) small neighborhood. Although there are huge opportunities and huge target markets (even just in this 1 city), the variety just isn’t there. Some of the same small independent labels are carried in the same stores (overlap), and there are only a small number of a particular style available (unless the independent retailers have HUGE stockrooms hiding somewhere).

    I think it may be a good idea for readers here to develop a resource for truly independent retailers as well as manufacturers. Maybe some kind of association? If that already exists, then I have to ask what the associaiton is doing, because something is dreadfully wrong.

    Maybe some kind of event, like a focsed consumer show, that sells products from independent DE’s?

    I think it’s funny that many people are increasingly being “forced” to shop at Federated-owned stores, and lots of people do walk in, but fewer and fewer customers buy. (Then the media squawks about “consumer confidence.”) Once again, huge opportunities for independent manufacturers AND retailers, if they can find a way to work together to tap into it.

    Any takers?

  3. Thomas Cunningham says:

    The problem with the indies, from my point of view, is that they buy very small — six or eight suits at a time — it’s hard to make any money this way. And you all complain about the department stores paying, but these guys are, for the most part, worse. The few stores I have that pay on time are like treasures to be handled with great care.

  4. Amanda Rodriguez says:

    let’s see.. 5-15% chargeback allowance, 10% advertising allowance, 8-10% markdown allowance and now they want a new store allowance (and 120 days to pay)..so the loss at wholesale (unless I raise my wholesale price) is about 30% before I even get in the store? that is so bogus.
    No wonder we have such greedy high prices in the stores.
    If they can’t afford the risk of opening a new store, then they shouldn’t open one.. to lay the risk factor on the vendors is just wrong..
    I refuse to sell to majors because of this type of garbage.

  5. J C Sprowls says:

    Cheers, Amanda.

    Simply stated… if they can’t afford to open, then don’t.

    What they’re doing is gambling that vendors don’t know to add the loss factor back into the base price. You can bet the savvy vendors hear the ching of lost money the moment that smarmy pitch floats across the table. Once bitten, twice shy, they say…

    If you’re a push manufacturer and are scared your inventory will age, this might look like a decent gamble. I promise you, it is not. I simply do not see this being in anyone’s best interest (other than the bankrupt store). See my financial explanation, below.

    In my opinion, a lean business cannot risk ‘loss leaders’. Just weed these propsects out as too much strain on your resources and forget about it. For what it’s worth: if the cash doesn’t flow, you shouldn’t produce.

    And while I’m being indignant…

    When someone pitches to me: “invest in this short-term, hi-risk prospect”, I say: “what is my rate of return?” and “how long will I hold this risk?” In other words: “WIIFM, babee!”

    What they are effectively asking you to do, here, is invest in the startup of their store. So, let’s treat this like an investment. For your investment, you are entitled to receive full wholesale price on your product, and you are also entitled to a return on your investment.

    Let’s suppose you decide you can afford to “lend” or “risk” $1000 in merchandise toward this prospect. For a 120-day investment, you are entitled to $523.20 as interest due at the end of the term. Yet, what this store is proposing is that you float them a loan of $1000, and they’ll re-pay you $700 at the end of the 120-day period.

    Hmmm… $700 in exchange for $1500? Now the business questions: Do you like these people that much to give them $800 of your money? What value or product did you receive that was worth $800? Will they make up your loss by giving you $800 worth of stock or ownership share?

    Now, if the store fronted the risk, I wouldn’t mention this because it should be a mute point. But, you are aware that this store collected $3800 from consumers in exchange for your merchandise, right? And, their net profit (if they repay you)is between $1800 and $2300, right?

    The inequity doesn’t seem right since you bore all the risk, does it?

    Question: If you abused your business partner, would you delude yourself to believe that he/she would continue to do business with you?

    FYI – Today’s prime credit interest rate is: 13.08% (www.bankrate.com).

  6. Linda says:

    I only sell to specialty boutiques so I’m curious to know how this dept. store thing works. What are sell through guarantees and what are all these allowances you mention?

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