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For Barneys' Brands, It's All About Damage Control

Under the owner Authentic Brands Group, vendors will not only lose a long-term buyer but also endure deep discounts in Barneys liquidation sales.
Former Barneys storefront in Brooklyn | Source: Getty Images
By
  • Cathaleen Chen
BoF PROFESSIONAL

NEW YORK, United States — Surratt Beauty is one of the brands that Barneys built.

“Our brand was created with the intention of launching at Barneys,” said Heleyne Mishan-Tamir, who co-founded the cosmetics brand — known for its eyelash curler — with Kevyn Aucoin protege Troy Surratt in 2013. “Launching exclusively with them really gave us the seal of approval that allowed other retailers to take notice.”

Today, the cosmetics label is one of dozens of companies owed money by the bankrupt New York retailer, which was sold to licensing company Authentic Brands Group and B. Riley Financial last week. These creditors, ranging from prestige beauty and fashion brands like The Row and Celine to Fedex and marketing firms, are among the last in line to be made whole; of the $271.4 million ABG paid, the vast majority will go to creditors who floated a $218 million loan to keep the department store open during its three-month bankruptcy process. What remains will be split among the remaining creditors.

“There’s usually something at the end of the day, but it could be 2 or 3 cents on the dollar,” said Eric Snyer, a bankruptcy attorney and partner at Wilk Auslander.

The pain doesn’t end there. ABG plans to keep some stores open, including part of Barneys’ Madison Avenue flagship. But the new owner’s real goal is to make money off of Barneys’ brand. Most merchandise will be liquidated, starting this week in storewide sales. Brands that relied on Barneys as a wholesale partner will need to make up those sales elsewhere.

It won't be today or tomorrow but it'll be an  accumulation of [consequences] that comes with losing millions of dollars worth of stuff to Barneys.

Celine and The Row will be fine — LVMH, in fact, is the only company whose brands cannot be discounted thanks to an ironclad contract, Barneys' liquidator Great American Group told The New York Times. But small, independent brands will need to find new outlets fast, particularly if they had exclusive arrangements with the retailer. Surratt's days as an exclusive Barneys vendor are over (the brand sells in 150 stores globally), but others, including many emerging jewellery brands, still saw Barneys as a make-or-break destination. Some companies relied on Barneys for 50 percent or more of their business, said Michael Flanagan, a former retail adviser who has worked with Repetto, Rick Owens and Spinelli Kilcollin, among others.

“A lot of these vendors don’t have a door to replace Barneys,” he said. “It will be a ripple effect. It won’t be today or tomorrow but it’ll be an  accumulation of [consequences] that comes with losing millions of dollars worth of stuff to Barneys.” He added that brands now are attempting to negotiate with Great American to buy back merchandise to avoid brand-diluting discounts.

In addition to being owed money, shoe brand Gray Matters has merchandise earmarked for Barneys in its warehouse as well as Spring/Summer 2020 products intended for the retailer currently in production in Italy. Other stores have already made their buys for the season, making it difficult to offload the extra inventory, said Silvia Avanzi, the brand's founder.

“It’s a loss for us unless we’re able to relocate the merchandise,” she said. “It’s further complicated because everything is made-to-order. We also manufacture some exclusive styles for Barneys but now we are left with these products.”

Brands that sell at multiple retailers could also find their merchandise on deep discounts during the Barneys liquidation sale, even as they are trying to sell items at full price heading into the holiday season.

“People who are not Barneys shoppers who may have shopped at Bloomingdale’s now have the chance to get Barneys luxury merchandise, which hurts Bloomingdale’s too,” said Geoffrey Lurie, president and chief operating officer of the retail consultancy Traub.

If there are products or great ideas out there, then someone's going to come along, whether it's a digitally native or retailer, to fill that gap.

Brands can mitigate the damage in the short term by containing the impact of the liquidation sale. In the long term, they can take a lesson from Barneys’ bankruptcy so they’re better prepared for the changes ahead in American retail.

“Retail is a story of revolution,” said Steve Sadove, the former chief executive of Saks Fifth Avenue. “You have to follow the consumer in the end … If there are products or great ideas out there, then someone’s going to come along, whether it’s a digitally native or retailer, to fill that gap.”

Vendors and retailers should work together to plan for holiday sales

For now, Barneys merchandise is on sale for 5 percent to 10 percent off. But the discounts are likely to grow, and bargain-hunters will soon be flocking to its stores and website.

Competing department stores and brands may see a temporary dip in sales during the peak holiday shopping season, as shoppers snag current-season handbags, shoes and clothes for 40 percent off or more at Barneys. In additional, the perception that a Balenciaga bag or Versace dress can be purchased at a deep discount may linger in some consumers’ minds long after Barneys closes its doors for good.

“[These discounted prices] will definitely dilute the brand across other wholesalers,” said Eric Fisch, national sector head of retail and apparel at HSBC’s corporate banking division. He said brands should emphasise newer items to differentiate their holiday offerings from Barneys.

Otherwise, retailers and brands need to match Barneys’ discounts.

“Vendors need to look at what remains at Barneys and see what kind of impact it will have on their products at Neiman Marcus or elsewhere,” said Gary Wassner, a financier whose business provides loans to fashion labels, including over 70 clients that sell at Barneys. “If there are duplications in style, size, or colour, they have to make that evaluation item-by-item and decide what to mark down.”

Get rid of Barneys-specific inventory ASAP

Designers that produced merchandise for Barneys during its bankruptcy are potentially stuck with an exclusive collection of products with no obvious buyer.

It's never a good idea for a designer brand to sit on inventory beyond a season.

It’s vital that vendors sell-off this merchandise as soon as possible, even if it’s at a loss via off-price channels or sample sales, said Wassner, who had about a dozen clients that continued shipping to Barneys during bankruptcy.

“It’s never a good idea for a designer brand to sit on inventory beyond a season,” he said.

These labels can also reach out to other retailers such as Neiman Marcus, Bergdorf Goodman or Nordstrom to see if they'd like to purchase the exclusive offerings.

Gray Matters’ Avanzi said she doesn’t plan on selling to non-traditional retailers at discounted prices. She’s looking to sell directly to consumers online, or at other high-end retailers.

“We will consider every possible option but we don’t want to hurt our brand image that we’ve built over time,” she said.

Grow and diversify distribution

If there’s one lesson that Barneys’ demise should provide, across the board, it’s that labels shouldn’t depend on one wholesale partner or even one particular sales channel.

First and foremost, brands “need to diversify with their wholesale accounts,” Fisch said. “If you’re concerned, start tapering early, because you can’t get yourself out clean in time if suddenly it’s headed toward bankruptcy.”

Retail is moving too fast for anyone to look at this … model that Barneys is going to find you, help develop you, and grow you.

This also means avoiding exclusive contracts overall, according to Flanagan, who said Barneys’ exclusivity tactics were dangerous to young brands.

“Retail is moving too fast for anyone to look at this … model that Barneys is going to find you, help develop you, and grow you,” he said. “You’ve got to grow the brand yourself.”

Building a direct-to-consumer model is a daunting task, but may be a worthy one. Pamela Love, for instance, began building her e-commerce business, which will cushion the blow of losing Barneys as a buyer, she told BoF.

“Of course there’s an impact,” she said. “But our e-commerce is just growing healthily and it's a combination of partnering with other retailers — holistic strategy of wholesale and direct.”

Ultimately, Barneys is a monumental loss on the New York fashion landscape. But it may not be the last retailer to fall. For brands, the prospect of future bankruptcies to come should be an incentive for change.

“If you are a strong business you need to understand that if events like this happen, you need to have a plan B,” said Traub’s Lurie. “That means alternate channels of distribution and a strong enough balance sheet. These are things you should be planning no matter what.”

Additional reporting by Cheryl Wischhover.

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