Suppliers feel retail's pain, too
It was as though a memo went out to the entire retail world.
Retailers big and small, healthy and distressed, issued a chorus of letters and phone calls to their suppliers in the spring, canceling shipments and asking for longer payment terms.
"Every single one of our retail partners over the course of the last six weeks has come to [us] for help," Sandra Betterson, general manager of accessories supplier Chateau International, said in an interview in April. "Every single retailer that had product going out in March, April, May, June has either canceled their orders or put every single thing on hold."
Along with the cancelations, retailers on 30-day payment terms asked to pay in 90 days. Those on 90-day terms, asked for another 90 days. Some who already were late on payments asked to have until June, and then to pay in installments, Betterson said.
With much of the retail world shuttered in response to the COVID-19 pandemic for most of the spring and early summer, retailers spread their pain up and down the chain. Many furloughed employees, cut management salaries and skipped rent.
And they squeezed their suppliers, too. Pulse Ratings documented more than 40 retailers that postponed payments to retailers during the early weeks of the pandemic. Dennis Cantalupo, CEO of Pulse Ratings, noted in an interview that the number of retailers that pressed for more favorable payment terms was likely even bigger than the list his firm compiled.
While large retailers issued press releases about how they were responding to and affected by the pandemic, their suppliers — many of them still suffering from last year's tariff wars — endured much of the same turmoil behind the scenes.
Some felt as though their relationship with retailers was only going one way during that moment, with retailers dictating the new terms of the pandemic world. Retailers had much of the leverage. And at a time when there was no cash going into the system and nowhere for their products to go, suppliers didn't necessarily have the budget or even see the point in legal fights when contracts were broken.
A frozen system
First came the canceled orders. Purchase orders were nixed as discretionary retailers across the country collectively closed tens of thousands of stores.
"The first week of the quarantine saw a wave of uncertainty take hold of the retail markets," David Wander, an attorney who chairs Davidoff Hutcher & Citron's bankruptcy and creditors rights practice, told Retail Dive in an email. "In the second week, the system completely froze, with large retailers such as Macy's canceling purchase orders across the board and furloughing almost all employees."
Wander added that vendor clients in India and Bangladesh "were in a state of shock, with multi-million dollar purchase orders being canceled by one retailer after the next."
Another supplier Retail Dive spoke with, who asked not to be named out of fear of damaging customer relationships, said that "every retailer and their brother was picking up the phone wanting to cancel" orders after store closures. For suppliers generally, products tied to canceled orders were everywhere along the supply chain: in warehouses, ports, on the water, on trucks on their way to retailers.
Betterson said that litigating canceled orders wouldn't be worth the effort and expense for many suppliers, as did others Retail Dive spoke with.
"It furthers the point that the suppliers are really looking at this as a partnership," Cantalupo said. "They understand the world we're living in and they're being reasonable."
In April, top executives at Stage Stores — a retailer already struggling with liquidity strains before the pandemic hit — told its supplier base it would require concessions on payment terms from them as the retailer tried to avoid bankruptcy. (It would later file for Chapter 11 on May 11.)
Stage Stores was just one of dozens, if not more, of retailers at the time making similar demands or requests, or demands thinly veiled as requests.
As with cancelations, there is little smaller suppliers can do when retailers ask for longer payment terms. "We have no recourse to go to but for our retailers to pay us," Betterson said.
And there again, suppliers understood the pandemic situation was dire and the circumstances extraordinary. Jay Foreman, CEO of toy maker BasicFun!, said where his company had receivables that they were being asked for extended terms for they were granting them when they could. "How can you pay us if you have goods sitting in a closed store?"
For suppliers that didn't like the terms, they had few if any options with much of the retail world shut down outside of grocers and mass merchants — the Walmarts and Targets of the world — that stayed open throughout the pandemic's early days as essential retailers. But that is a limited market, and getting products in those stores has always been competitive.
"It's always a negotiation, and the suppliers realize that and they're pushing back where they can," Cantalupo said. During the pandmic, he said, "what's the sense of pushing back? No one's buying goods from you. You can't force someone to pay you. They're gonna pay you when they pay you."
Cantalupo added that suppliers were hoping to have more leverage once physical retail reopened. And noted that retailers had to be mindful of supplier relationships and not alienating their suppliers for when doors were open again. "There might not be unlimited merchandise to go around."
As part of the retail ecosystem, suppliers went through many of the same challenges as retailers. Revenue dropped off or disappeared, making cash a scarce resource. When things did start to reopen, there wasn't a widespread return to retailing as usual with hot spots across the U.S. continuing to affect operations. And so companies are making all the same tough decisions as retailers.
"We have furloughed employees. We have terminated employees. We have cut salaries to employees. All three," Betterson said. Other suppliers Retail Dive spoke with furloughed or laid off employees as well early on.
Suppliers also filed insurance claims, or tried to, and some applied to federal stimulus funds and Small Business Administration programs. Like retailers, they also negotiated with landlords and other creditors. Foreman said his company was paying 50% of its rent in the early days of the pandemic and asked for forbearance where possible.
But while everyone suffered from a cash flow dearth, it wasn't and isn't necessarily felt in the same ways or in the same measures across the ecosystem.
Betterson said the vendor side got "the hardest part of the stick" in many respects. "We have the goods. We have the open invoice. We have the same expectation to pay our rent, the same expectation to pay our suppliers, the same expectation to pay our employees."
She added: "And when doors open for the retailers, there should be, hopefully, an immediate cash flow from their consumer. But they have that money — they have it and they're holding it back from us. They have time to use those funds."
A lost quarter
And also like the retailers they serve, suppliers had to try to understand when business as usual will resume and what comes next.
Wander said that in the spring retail and vendor negotiations anticipated at least some manner of reopening in the summer — which has happened in many regions. As part of that some purchase orders were restored and discounts were negotiated.
The big uncertainty is what the future holds, how it could impact stores and how consumers will react. For some, the second quarter was written off, and the focus shifted to back-to-school and holiday. Though uncertainty hangs over both those periods now, too.
Betterson said her company had product set to ship this spring for the Easter holiday. "What do I do with a bunny rabbit Critter Crew handbag tomorrow?" she said.
For Foreman and his company, the pandemic's timing landed, mercifully, in one the slowest periods of the year for toy sales, after many of his retail customers had already paid off their bills from holiday shipments. Had it hit in August, with holiday shipments out, it could have been disastrous for toy suppliers, and plenty of others.
Still, Foreman said he watches the news carefully and was concerned about what happens if stores remain closed for an extended period, the pandemic recurs in another large wave or if consumer spending remains depressed after stores reopen. He also worried about some retailers financially on the edge.
"You have to think about if they're going to open," he said.
Article top image credit: Getty Images