Strategies for Boosting Sales and Saving Money

With economies slowing around the world, manufacturers and importers are faced with a number of challenges.

Where is the next hot spot for sales? How do you deal with retailers’ increasing demands for higher margins and guaranteed sales?

California Apparel News Senior Editor Deborah Belgum quizzed various financial experts in Southern California about their outlook on how to cope in this economy and where to grow.

The experts:
Ron Garber, Executive Vice President and Western Regional Manager, First Capital; Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.; Sunnie Kim, President and Chief Executive, Hana Financial; Dave Reza, Senior Vice President, Milberg Factors; Tri Sciarra, Executive Vice President and Los Angeles Regional Manager, Capital Business Credit; Jeffrey Sesko, Vice President, Rosenthal & Rosenthal of California; Kevin Sullivan, Executive Vice President, Wells Fargo Capital Finance; Ken Wengrod, President, FTC Commercial; and Paul Zaffaroni, Director of Investment Banking, Roth Capital Partners

Are retailers increasingly asking vendors for guaranteed sales, and how is this affecting the financing of accounts receivables?


Ron Garber
Executive Vice President and Western Regional Manager
First Capital

Ron Garber: We haven’t seen a kick up in guaranteed sales either by customer numbers or volume, but we’re aware they’re out there. It seems the same accounts continue their practice of “consignment” sales, and as a vendor you just have to be aware of the risks and consequences. The shopping networks are notorious for this practice, and yet many vendors are anxious to do business with them in an attempt to seize a new channel of distribution. We as lenders consider guaranteed or consignment receivables as ineligible for borrowing purposes although we ask that the collateral created by these revenues be assigned for whatever value they might eventually realize.


Rob Greenspan
President and Chief Executive
Greenspan Consult Inc.

Rob Greenspan: While I haven’t seen any “written” documentation or agreements stating that sales to major retailers are now “guaranteed” sales, I have seen and heard about increased margins the retailers want to maintain from the manufacturers or importers. It should be noted that a guaranteed sale/consignment sale for purposes of financing or accounting properly is not a real sale. If the retailer does not technically own those goods until they are sold to their customers, this is still considered inventory on the manufacturer’s books and records and not a sale. A consignment sale or guaranteed sale is not financeable. But the heart of the question is whether the retailer is trying to take on less risk or get more margin from the manufacturer or importer. My response is yes. I have heard more recently about increasing margin demands from the major retailers as well as continued requests for significant markdown support. Either way, this makes it tougher on lenders to evaluate the current accounts-receivable borrowing base.


Sunnie Kim
President and Chief Executive
Hana Financial

Sunnie Kim: We do not often see retailers requesting guaranteed sales from our vendors. We realize manufacturers can be pressured to accept consignment terms from retailers to increase business and remain competitive—specifically, industries such as jewelry, for which price points may make inventory harder to move. However, these types of sales are problematic if a lender is using them to finance the resulting receivable.

Tri Sciarra: At Capital Business Credit, we are not seeing retailers ask our clients (manufacturers and importers) for guaranteed sales, nor are these terms we would generally endorse. Therefore, this is not impacting our clients or Capital Business Credit’s ability to finance receivables.


Tri Sciarra
Executive Vice President and Los Angeles Regional Manager
Capital Business Credit

Dave Reza: Our clients find that there steadily has been increasing pressure on pricing. It comes in various forms: lowered pricing, markdowns, co-op advertising and other fees. Guaranteed sales, per se, would not be factorable. However, these are rare incidents. Typically, we see and react to historical and short-term dilution in our client portfolios caused by various factors. The rate and/or scale of the dilution will determine how we and other factors react to it.

Jeffrey Sesko: In light of our slow economy, retailers continue to look for ways to reduce the risks and costs associated with building and maintaining inventory levels. Guaranteed sales and/ or a liberal return policy are common requests these days. When lending against receivables, the historical dilution percentage is always a major consideration.


Jeffrey Sesko
Vice President
Rosenthal & Rosenthal of California

Kevin Sullivan: While most retailers would hesitate to call it that, we would have to say that the trend continues to head in that direction. It has caused manufacturers and importers to more closely assess the relationships with each retailer and determine which will remain key relationships and which they’ll consider forgoing in the future. Because the trend isn’t really a new one (it’s simply accelerated over the past year or so), it hasn’t had an exceptional impact on the financing of accounts receivable other than to drive home the point that lenders will continue to monitor dilution on accounts receivable and have a clear grasp on the relationships and agreements that vendors have with retailers.


Ken Wengrod
President
FTC Commercial

Ken Wengrod: Lenders do not want to lend against guaranteed sales. It has been going on very subtly for a very long time. A lot of time, what is happening is that retailers will do “swapping” and lenders didn’t know it. It was not as pronounced as saying it was guaranteed sales. But there were so many agreements being done quietly that a lot of times lenders didn’t know what they were lending against. I see it as a practice that is increasing. You ship one order that doesn’t move and the vendor takes it back and ships another order. To me that is guaranteed sales. Today, retailers are looking more and more to get goods they can return so they don’t have to increase their inventory. But lenders need to be aware of it. For vendors, it is a way to get goods out on the floor and see how they performing. And yes, we are seeing more of it, and it will continue. But vendors and retailers need to be more open about it.


Dave Reza
Senior Vice President
Milberg Factors

Many manufacturers were hoping to increase revenues with more sales to Europe, but the economic downturn there has changed that. Where do you see growth areas for manufacturers to tap?

Ron Garber: Our experience has shown that most of our Western clientele had done very little, if any, sales in Europe. If they did seek foreign markets to sell into, they mostly chose Mexico, Japan or Australia. In these countries they would go directly to major retail accounts and establish long-term relationships while their strategy in Europe would be to deal with primarily independent distributors without developing any real direct customer loyalty.

It is true that the worldwide recession has affected all markets to some degree, but I don’t think the severe financial strains in the E.U. have been particularly troublesome to our local manufacturing base.

Rob Greenspan: With less and less retailers to sell, I would still suggest trying to find quality foreign distributors. They do exist and can help with some sales increases. I have seen, over the past several years, more and more manufacturers starting to sell the “one-off” boutiques and smaller specialty stores. More and more are soliciting these smaller stores and selling them on credit-card terms. While this can be an administrative headache to get started, once up and running it can be a profitable business segment for some. And I have seen the opposite as well. Companies that have a large specialty base and have stayed away from the majors are now trying to ease back with some of the major stores to try to regain volume that has been lost over the past several years.

Sunnie Kim: Although many countries in Europe are affected by the current economic crisis, and others, such as China and even our own, are under economic pressure, many countries in the world are emerging from previous second- and third-world status into developing capitalistic economies. According to published reports, 103 nations reported gross domestic product growth in excess of the world average of 3.7 percent. Countries such as those that comprised the former Soviet Union and others located in the region of Southern Asia, if not thriving, are certainly robust and are potential candidates for growth. Additionally, the current economic downturn in Europe hasn’t affected every country, and some continue to have very strong economies, such as the Netherlands, the U.K. and France.

Dave Reza: Growth opportunities may be a function of geography, product and/or price points. For example, our clients with luxury brands may find opportunities in emerging markets such as Eastern Europe, Latin America, India and Asia. Other clients have focused on developing new products or lines and targeting domestic specialty or chain stores to whom they have not previously sold.

Tri Sciarra: Clients continue to explore opportunities in Europe with limited success. At Capital Business Credit, we are encouraging our clients to look for growth opportunities domestically. As the U.S. economy slowly continues to grow, it is important that manufacturers/importers focus on their core customer base and continue to increase loyalty amongst this critical category. It is also important that before a manufacturer/importer sets out to grow, they make sure that they have working capital and equity in place to fund that growth.

Jeffrey Sesko: The economic downturn in the global marketplace continues to be significant. Finding new geographical areas that could provide significant growth opportunities are few and far between. More and more manufacturers are focusing on the Internet to provide “direct-to-the-consumer” revenues to increase sales growth.


Kevin Sullivan
Executive Vice President
Wells Fargo Capital Finance

Kevin Sullivan: Most of our clients with a sizable percentage of sales in Europe are having to reassess strategy, which can sometimes lead to a change in sources of distribution and difficult decisions around maintaining their own staff in Europe versus shifting toward outside distribution. The growth that we’re seeing right now tends to be in manufacturers deepening relationships and increasing sales with existing retail customers in the United States. It’s generally either coming from increased efficiencies that enable manufacturers to provide better price points on a more timely basis or the creation of solid brands that retailers decide are vital to their merchandise mixes. The trend toward larger retailers creating relationships that result in private brands has also continued to accelerate.

Ken Wengrod: I still see certain areas of Europe being strong. Obviously, it is not Spain, Portugal or Italy. But Russia is strong, and I consider that a part of Europe. The retail environment is strong there. Germany is still holding its own. I am deeply concerned about the potential in the Asia market. We are seeing a lot of luxury brands open more and more retail stores in China, from Prada to all the others. What I am concerned about is that there could be a huge housing bubble in China, which would have a huge effect on the [Chinese] consumer market, which will have an impact on the European companies selling into China. That will have a ripple effect. With the right product, people are still looking at U.S. brands, not only in China but South America and Latin America. There is a huge market in Mexico City. There is a much smaller market in Costa Rica and in South America, like Peru and Chile.


Paul Zaffaroni
Director of Investment Banking
Roth Capital Partners

Paul Zaffaroni: Manufacturers with strong brands have multiple avenues for growth but need to be selective while pursuing in the current macro environment. Asia’s economies have performed better on a relative basis than other parts of the world and present an opportunity with their expanding middle class and desire for U.S. and European brands. Tory Burch has opened stores throughout Asia over the last few years and expects this region to be a significant part of its revenues on a going-forward basis. Extending your brand into new categories is another opportunity for growth. Premium-denim brands such as True Religion, Joe’s Jeans and now J Brand have followed the Guess blueprint by entering new categories such as sportswear and accessories. These new categories need to be pursued in a strategic and thoughtful manner, which is why J Brand waited six years before entering. Building a more robust e-commerce platform can be the most profitable way to grow because the manufacturer can capture more margin and have the ability to reach a broader audience more efficiently. Tommy Bahama recently launched a global e-commerce platform, which allows consumers in 108 countries to easily purchase products from their website. E-commerce should continue to growth faster than retail sales in the foreseeable future, so it’s essential to have good strategy in place.