Selling to department stores pt.1

It seems that selling to big box retail stores is the pinnacle aspiration for the uninitiated. When anyone asks me how to attract attention from the majors my first thought is “why would you want to?” As with many things, be careful what you wish for; you just might get it. The first question should be, do you really want to sell to chain stores? And if so, to which ones? Let’s do this second question first, it’s shorter.

Which clothing stores do you want to sell to?

I know what you’re thinking, you’ll take whomever or maybe you have someone in mind. Unless you’re doing bridge, I have a better suggestion. For example, in my quality quiz, I asked which of these stores (Neiman Marcus, Nordstrom’s, JC Penney’s) had the best and most consistent quality standards and nobody got the right answer (Penney’s). Don’t get me wrong, I’m delighted if one of my DEs is selling to Nordstrom’s or Neiman’s but if you’re selling to Penney’s, every other retailer will buy from you for that reason alone. I realize few people here have dreams of selling to vanilla Penney’s because it’s not glamorous but it’s a good example of things not being as they appear. At close, I include names of stores small companies should consider before a chunk like Penney’s.

Do you really want to sell to retail chain stores?

easybutton Before I launch into the recitation of what this involves, please know I know you’re not stupid. I know you know this isn’t easy. At the same time, I know everybody is looking for a big red EASY button. There isn’t one other than the one you see over there on the right. People are seduced by the idea of lots of sales in one fell swoop (easy) but it takes a lot of money to do it. Or maybe you’re looking for someone to take you there. That can happen. Either way, there are no short cuts. Read my book and follow those steps. If you’re really serious about it, do more than dream. Make it happen for yourself. Ask yourself this question honestly, if you had all the money, expertise and time in the world, would you take you to the next level? Or would you help someone who was further along? People who are successful and in a position to help you are those who’ve done hard work. There is no easy; strive to be like that which you seek and it will find you.

5 things to know before approaching department stores

You think my site is bad, you’ll have to start reading things like Supply Chain Digest. Selling to big box stores requires a whole other level in both operational and computing complexity. Both require commitments towards increased internal operational efficiencies and considerable financial investment in the necessary tracking and monitoring systems. In addition to the core concepts I explain in my book, these are the biggies:

  1. Vendor compliance standards
  2. EDI -electronic data interchange
  3. Getting paid -Factoring needed.
  4. Discounts and returns
  5. Penalties for non-compliance (chargebacks)

Vendor compliance standards:
Retailers have strict vendor compliance standards because they buy thousands of products and having rules for individual vendors is not possible. Standards start with something as inconsequential as good style numbers (not names), SKUS and compliant packaging. Worse, each SKU must be in its own shipping carton meaning it’s conceivable you have a 100 piece order that would fit in one box but you’ll need to split these up into however many boxes as determined by SKU. Your boxes must be labeled according to strict standards. You can only use designated shippers and can only deliver at a specific scheduled time.

Every retailer has a vendor compliance program which is explained in their vendor compliance manual. I collect these, I have over 200 manuals from various retailers. These are proprietary so they’re difficult to find. I did find one sample (pdf) on the web you can download (grab it before they pull it). I wrote a two part review of a book that is a mere starting point of VCS.

EDI: Electronic Data Interchange
You need complex EDI software that again, retailers will often designate. I haven’t priced the software lately but I sincerely doubt there is a compliant package that costs less than $10,000. My guess would be closer to $50,000. EDI entails more than software. It takes the right hardware, peripherals, web connectivity and dedicated personnel to manage it. EDI is such a heady topic that I can’t even decide which book to buy to read about it. I’m open to suggestions if you have one.

Getting paid -Factoring needed
I realize people think selling to big box stores means lots of money. It can but retailers are very slow pay, typically 6-9 months. Wal-mart, for all its ills, is a radical exception. They pay within 30 days. In other words, if you need the money, you will need to be factored which means borrowing money from a business against the value of your invoices. The kind of factoring you need depends on your industry and the retailer. If you are in an industry that is not apparel related (or your buyer is mostly not an apparel seller), you can get non-recourse factoring which costs 2%-3% of invoice above and beyond other financing costs you may have. If you work in apparel, you’ll need a different sort of factoring which costs 15%-20% of invoice.

Discounts and returns
It is not unusual to have “sell-through guarantee” agreements with large retailers. For example, you will be required to agree that 85% of your goods must sell within a given period. If not, you agree to accept these items as returns. This is in addition to the set discount schedule. For example, your unsold goods are marked down 20% after 30 days, 40% after 45 days etc. If 85% (for example) of your goods don’t sell within the established period, it’s either returned or destroyed. It’s heartbreaking but it sometimes costs less to destroy product than to pay the store to ship it back. Sure, you can offload it in the off-price market but this is yet another layer of complexity resulting in pennies on the dollar for your efforts.

Penalties for non-compliance:
Retailers will issue charge backs, which are penalty fees they deduct from the amount on the invoice if you don’t follow their rules. It’s not like shipping to an individual or independent store. They will levy fees if you put the hangtag or labeling in the wrong place. More if you accidentally ship the wrong colors, sizes etc. Chargebacks can be quite contentious, Saks was sued by their vendors and the SEC brought charges. While not typical, it is not unheard of for chargebacks to exceed the value of the invoice meaning you will have to send them a check to pay your fines rather than vice versa.

All of this costs money, lots of money. In addition to your company’s infrastructure, the very process by which you produce goods will radically change. Considering all the costs, you will have little alternative than to produce offshore. If you welcome the change or are already doing it, it will make little difference to you but for others, outsourcing implies much longer development and production scheduling time lines.

If you find yourself in such position to explore the world of large scale retailing, I do have a few recommendations. Some retailers are small company friendly and will walk you through it. Some of these retailers are Whole Foods, REI and Amazon. I think doing business with any of these retailers amounts to a good training program if you’re seriously considering this option and want to grow internally rather than bringing in an outside consultant or other interests to take you to the big leagues.

Be mindful. Sales are seductive. Whether you go full bore or are satisfied with limiting your sales to independent stores, you need to do the same ground work to improve your operations by adopting standards typical in the industry. If you do that, you can’t lose either way. What’s more, becoming streamlined when you’re small means you become more attractive to investors who can take you to another level if that’s what you want. The good news about improving operations incrementally is that it rarely costs money or if it does, not very much because you get an immediate ROI that covers the cost of the improvement. Whatever you do, don’t become trapped in a system that conflicts with your values or manner in which you choose to conduct your affairs just because the allure of sales is seductive.

Selling to department stores pt.2 (EDI)
Selling to department stores pt.3 (compliance)
What are SKUs?
What are UPC codes?
How to assign SKUs and UPCs
Do you need your own bar codes?

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