FINANCE

How Apparel Manufacturers and Retailers Are Coping With the E-Commerce Threat

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Sydnee Breuer, Senior Vice President, Business Development, Rosenthal & Rosenthal

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Mitch Cohen, Western Regional Manager, CIT Commercial Services

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Rob Greenspan, Owner, Greenspan Consult Inc.

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Nick Hart, Managing Director, Bibby Financial Services

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Sunnie Kim, President and Chief Executive, Hana Financial

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Dave Reza, Senior Vice President, Milberg Factors

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Paul Schuldiner, Managing Director of Business Development, King Trade Capital

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Ken Wengrod, President, FTC Commercial Corp.

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Paul Zaffaroni, Director of Investment Banking, Roth Capital Partners

These are tough times for traditional retailers. Many big store chains and specialty stores are finding their business is being swept away by websites that make it easier for people to shop any time of the day or night without even moving from the couch.

The competition for sales is growing stiff with people downloading mobile-phone apps for shopping, browsing shopping sites via their tablets or computers, and saving time and gas if they don’t venture out to malls or shopping streets.

Goldman Sachs predicts that U.S. retail sales directly on smartphones will more than double from $70 billion this year to $173 billion by 2018. Similarly, tablet sales will more than triple from $130 billion this year to $453 billion in 2018.

Apparel manufacturers and others are finding that as retailers adjust their business models to compete with e-commerce, so must they.

What does the future bring? A number of financial experts shared their thoughts about how retailers are reacting to consumer shopping patterns and, in turn, how this is affecting manufacturers

With e-commerce playing a greater role in shopping and consumers still cautious about spending, how are retailers changing their purchasing patterns? Are they making smaller orders, asking for shorter delivery windows or doing more reorders? How are manufacturers adjusting to this?

Sydnee Breuer, Senior Vice President, Business Development, Rosenthal & Rosenthal

The biggest change I’ve noticed in retailers’ purchasing patterns with e-commerce is having the manufacturer/importer/distributor ship directly to the consumer.

This creates many smaller invoices. And whether you use a factor to handle the receivables or handle it in-house, there is a definite cost involved with each invoice generated. So the smaller the invoice size, the more costly it is to process and handle the invoice.

With the supplier shipping direct to the consumer, it takes the inventory risk away from the retailer and onto the supplier, who must be sure they have inventory in stock to ship should an order come through via e-commerce.

Mitch Cohen, Western Regional Manager, CIT Commercial Services

With an increasing number of consumers turning to e-shopping, many major retailers are making an effort to place a broader assortment of styles and sizes on their e-commerce sites as compared with their stores. These retailers also continue to look for ways to carry less inventory in spite of the consistent increase in online sales.

We are seeing manufacturers, on the other hand, ship on a consignment basis and/or hold inventory in certain cases where the manufacturer makes direct shipment to the consumer based on the orders that a retailer gets on their e-commerce site. Manufacturers appear to be willing to make these accommodations as it’s helping to increase their overall sales, and many are also investing in their own e-commerce sites.

Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.

Many retailers seem to be placing smaller orders with much closer delivery dates. So far during 2014, for me, I have yet to see any significant patterns evolving for reorders.

The poor weather in the Midwest and eastern parts of the country and other economic factors have played their roles in an unpredictable first quarter. Time will tell the effect of the increasing e-commerce business and how, in the long run, this will play out for the manufacturers and importers of apparel.

On the manufacturing/importing side of the business, companies need to be cautious in placing their inventory orders for either finished goods or fabric. I have seen many companies upgrading their e-commerce websites as direct demand from consumers is becoming increasingly important to their business. Keeping pace with these changes can help a company grow its own e-commerce revenues, which in turn can increase the gross profit margins.

Overall, business conditions between retail and e-commerce are changing. The successful manufacturer/importer will need to keep up with these changes in both parts of their companies.

Nick Hart, Managing Director, Bibby Financial Services

Tight inventory management at retailers remains critical for their success, particularly for those that operate a bricks-and-mortar model. You see the big chains increasingly active and driving increasing volumes on their e-commerce sites but also trying to divert some sales into stores, increasing footfall.

We are seeing smaller orders with subsequent multiple reorders. Some powerful retailers will demand a certain amount of on-hand inventory be held at the supplier. This puts significant pressure on the suppliers’ cash flow. There is a rise in product/celebrity exclusivity deals as a demand-led strategy helps to drive customers to either the stores’ physical locations or their website.

E-commerce retailers continue to gain ground from a volume perspective and are increasingly confident with their orders being placed. Online is no longer solely for off-price. As consumer confidence returns, consumers are increasingly willing to buy online at full price, provided that they are confident in the returns policy. This is giving rise to significant issues with serial returners.

Retailers are now employing analytics to tailor special product releases and offers to customers that have low return rates. Brands need to be careful of how the automatic-return policy is applied to their payments when dealing with online retailers.

Shorter lead times and rising wage rates in China are creating opportunities for manufacturers to make in the U.S. However, rising minimum-wage requirements and employer responsibility under the Affordable Healthcare Act are increasing the prices of domestically manufactured garments.

Locally manufactured product allows for shorter lead times fulfilling reorder strategies and significantly reduces the supply-chain risk for the supplier. Consumers have to be willing to pay a fair price for domestically manufactured product. Retailers have to allow that small increases in retail prices flow through to the manufacturers to pay for the increased labor costs rather than the retailers retaining the bulk of the increase. As ever, it is a delicate balance.

Sunnie Kim, President and Chief Executive, Hana Financial

All retailers are under pressure to do more e-commerce. It is no longer the wave of the future but very much the present. We have seen certain big-box stores reduce either the number or size of their locations and devote more resources to e-commerce.

Most retailers appear to be keeping smaller inventories on hand, maintaining shorter purchasing windows and focusing on staple products while staying away from speculative items.

Therefore, manufacturers have had to adjust, conforming to the requests of retailers. This, of course, creates a ripple effect from their suppliers with respect to purchasing patterns, deliveries and seasons.

Dave Reza, Senior Vice President, Western Region, Milberg Factors

The growth in direct-to-consumer and business-to-consumer platforms continues to impact retailers and wholesalers (manufacturers/importers) alike.

Retailers benefit because e-commerce allows them to improve sell-through while reducing inventory investment.

Retailers are buying closer to the season, reducing the risks and cost of holding inventories.

Retailers can offer the same or a wider selection of styles/sizes on their websites without fear of not having the goods in stock.

Retailers can now rely on wholesalers to fulfill consumer orders for styles/sizes that are not “on the floor.”

Orders are smaller. Even one-off consumer orders are fed directly to the wholesaler.

Wholesalers gain an additional sales channel and “virtual” real estate with the retailer:

The wholesaler must carry stock SKUs in order to meet the requirement that they fulfill consumer orders quickly.

The wholesaler will have to do a good job of projecting the retailers’ needs so there is a selection of goods available close to season.

Conversely, wholesalers will have to have strong relationships with discount channels and flash sites in order to dispose of excess inventory at season’s end.

Both parties benefit from increased revenues, customer intelligence and, most importantly, customer satisfaction.

Paul Schuldiner, Managing Director, Business Development, King Trade Capital

We have found that retail purchasing patterns have become more selective and conservative. The movement to a just-in-time model (unless the program is a “load in” order) makes the delivery window much shorter than the traditional importer/manufacturer has been used to.

This creates tighter cash flow as overseas production may still have to be placed with a longer lead time depending on the size and financial capacity of suppliers that are being utilized. This may create an opportunity for increasing domestic or near-shore production where these lead times may be more manageable.

However, the paradox to this is that one other trend with respect to holiday-season sales and Black Friday promotional sales is that the retailers are finalizing these orders no later than mid-September, which is in contrast to what we used to see several years ago. It used to be that we would see large purchase-order finance requests in late September and even early October.

The retail community has basically shifted to a purchasing model that concludes the purchasing earlier in the year in the attempt to better manage inventory. As such, clients are utilizing our financing earlier in the calendar year for holiday and Black Friday seasonal orders than they had done previously.

Ken Wengrod, President, FTC Commercial Corp.

While monthly personal consumption is up, consumers are not spending at traditional bricks-and-mortar retail stores. When the economy builds steam, I believe the bricks-and-mortar retailers that carry a variety of consumer merchandise, from clothing to electronics, will be hit the hardest.

Bill Martin, founder of data firm ShopperTrak, which monitors 60,000 retail stores, notes that “we are in something of an evolutionary process where Americans are spending more online and becoming more careful about what they purchase.”

Data compiled by Reuters indicate department stores capture only $3.37 of every $100 of U.S. spending, the lowest since records were first compiled in 1991, when the amount was $9. Therefore, fewer dollars are being spent at department stores.

I strongly believe retailers need to first address their merchandising efforts. It appears some have lost their merchandising direction and have missed the fashion trends. The issue in this case is not just speed-to-market but having the right merchandise at the right time.

There is no doubt the bricks-and-mortar retailers are placing severe pressure on manufacturers to reduce the trade cycle and have inventory readily available. Further, if the goods don’t sell at retail, then the manufacturer will eventually take a hit and end up with excess inventory.

Astute manufacturers have been adapting to the changing times by switching their distribution patterns and selling more and more to online retailers, who use data to assist them in better buying projections, which greatly reduces the chance of a bad buy.

These manufacturers have found ways to shave off logistic times in their trade cycle, cut their unnecessary overhead and become streamlined in their own operation. It appears the online retailers have learned from the great merchandisers that the loyalty of a brand is not with the retailer but, instead, with the ultimate customer—the consumer. This is a belief the bricks-and-mortar retailers seem to have forgotten.

Paul Zaffaroni, Director of Investment Banking, Roth Capital Partners

E-commerce sales of apparel have grown dramatically over the last five years while traditional retailers have seen their market share decrease.

Retailers that are achieving success in this environment have either invested in technology or people to provide an omni-channel experience or provide a compelling value proposition in terms of product offering or price.

Nordstrom, which is known for its customer service, invested in Bonobos and acquired HauteLook to broaden its offering and online expertise. Kate Spade, Michael Kors and Tory Burch have prospered by positioning themselves as “affordable luxury” brands initially focused on accessories or footwear, which are easier purchases for consumers in an uncertain economic environment.

The department-store channel continues to consolidate with Hudson’s Bay, acquiring Saks Fifth Avenue at the end of 2013, making this channel more challenging for manufacturers and brands to do business with.

Large retailers have more buying power and are ordering closer to need while demanding more flexibility from manufacturers and brands. Brands that are attracting the most interest from private-equity investors are less dependent on large retailers and have developed a closer relationship with their end customer through company-owned stores, e-commerce and digital strategies.

Nasty Gal and Warby Parker have achieved high valuations by building their brand and community online before opening their own retail stores. Large retailers will always be an important channel for many brands, but it’s important to adapt to the changing retail landscape by partnering with companies that have online expertise or hiring those folks at your company.

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