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What to Do When Retailers Don’t Pay

While small fashion labels have little recourse when it comes to collecting their bills, there are tactics they can use to build leverage — or at least mitigate losses.
vendors, payment, inventory management.
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For years, Sanaz Gera had worked as a technical designer for brands like Adam Lippes and Draper James, and by the summer of 2019, she was ready to showcase her vision for luxury sweaters and knit pants under her own line, Oyun.

Gera couldn’t afford the online advertising required to build a business around selling directly to customers from Oyun’s own website. So she sold her products through retailers, including Verishop and Wolf & Badger. One site, Olivela, looked particularly promising: it carried brands like Gucci and Moncler, and promised to donate 20 percent of sales to charity. That resonated with Gera, who also gave a portion of her brand’s revenue to a nonprofit each season.

Gera’s creations sold well on Olivela, with the two companies splitting the proceeds equally. But payment from the retailer was sporadic. By February, Olivela owed Oyun about $18,000 for completed customer orders dating back to August. Without that money, Gera said she couldn’t begin producing her next season.

She wasn’t alone: Olivela was behind on payments to at least six other vendors, BoF has learned. Gera said she received a wire payment for its outstanding balance on Feb. 2. In a Feb. 15 email, a representative for Olivela told BoF that, “a pandemic-delayed financing this month that has allowed (and is allowing) us to come current with Oyun (and other brands).”

Brands and retailers have tussled over bills since the dawn of wholesale. Often, missed payments are a sign a retailer is struggling. But even thriving department store chains have been known to delay payments to vendors.

I was writing emails every day for payments.

However, these conflicts have become more common since the start of the pandemic, as stores closed and apparel sales plunged globally. For small brands in particular, the results have in some cases been catastrophic. Many labels that rely on wholesale have seen the bulk of their cash flow held in limbo, or in the case of sellers at Neiman Marcus, J.C. Penney and others, caught up in the bankruptcy process.

“I was writing emails every day for payments,” said designer Batsheva Hay, who, at the peak of the spring lockdowns relied on wholesale for 95 percent of her sales. Ultimately, Hay gave up on some accounts, and has since revamped her business to focus more on direct sales, which now makes up half of her revenue.

Retailers often have the upper hand in these fights. Brands are typically unsecured creditors, meaning they don’t have collateral they can collect if a wholesale partner fails to pay. A designer can sue for nonpayment, but small labels rarely have the spare time and cash to pursue a legal battle.

That leaves negotiation as the more popular option. For brands, the objective is to keep the lines of communication open. It might be in their best interest to reach a compromise with a retailer to preserve a normally lucrative account. Often payment will come, though perhaps via installments or the return of unsold merchandise, said Shan Reddy, an adviser to independent labels.

“I highly encourage people to get on the phone and work things out with the [retailer], or even better, get together in person,” Reddy said.

Sometimes, a label is out of luck, however. Reddy said he has clients that have been waiting a year or more to be paid in full. When a retailer flat-out refuses to pay, the only bright side might be the resulting tax write off.

The Nuclear Option

Taking a retailer to court may not be worth the cost or effort. Attorney bills add up, and courts move slowly.

The law may not be on an unpaid brand’s side, either. Purchase orders, while technically contracts, aren’t signed by either party and aren’t always crystal clear about what happens when scheduled payments are missed.

An initial consult with a lawyer is typically free, and it might cost $1,000 or less to hire one to write a letter or make a call to a retailer demanding payment.

“It was really shocking to me ... that we’d be going off of this slip about the numbers of orders without signing anything,” said Hay, a former corporate attorney. “They agree to it, you agree to it, but there’s something that just feels informal.”

While a lawsuit is expensive, an initial consult with a lawyer is typically free, and it might cost $1,000 or less to hire one to write a letter or make a call to a retailer demanding payment, said Susan Scafidi, founder of the Fashion Law Institute, a legal clinic.

Danielle Corona, founder of the handbag label Hunting Season, has had late invoices suddenly paid off after she threatened to hire a collections agency. Hay said she hasn’t had much luck with debt collectors, however. The retailers most likely to be late on payments also have the least incentive to catch up; in bankruptcy, vendors are typically near the bottom of the list of creditors to be paid.

The Court of Public Opinion

Brands have another option to get a retailer to pay: go public.

“If the retailer knows you’re speaking out about them ... they’ll be more sensitive to not have a negative experience [with] you,” said Eric Fisch, national sector head of retail and apparel at HSBC’s corporate banking division.

The effects of negative publicity can snowball, as other brands demand early payments or halt shipments of new products, he added. In the case of Barneys, for instance, securing exclusives with emerging brands became more and more difficult as the now-shuttered department store developed a reputation for being a difficult partner.

Even with the facts on a brand’s side, mounting a public pressure campaign isn’t easy: consumers may not be moved by the details of a contract dispute, and the retailer still might not budge.

“I would say this is a last resort,” Scafidi said.

Preemptive Steps

Fisch recommends his clients work with an intermediary to reduce their exposure. Factoring firms, for instance, can agree to secure a brand’s purchase order with a retailer, which means that if the retailer doesn’t pay, the factor will.

“Factors are ... taking on that risk, they’re also fully motivated to collect that money,” said Fisch. “And they have the scale to do so, forcing the retailer to take them very seriously.”

Hilldun, a large factor, works with over 400 brands, according to chief executive Gary Wassner. If a retailer fails to pay one of its clients, it can threaten to warn hundreds of other brands about working with them, he said.

Factors also have credit information on a number of retailers, Wassner said, which allows them to verify the risk involved in securing transactions with certain stores.

Factors aren’t free; Wassner said his fees are about 3 percent of sales. Oyun, Hunting Season and Batsheva all work independently from factors, citing cost as one of the reasons.

Choose Wisely

Brands have more leverage these days. Many of the biggest labels, including Gucci and Prada, have cut ties with certain wholesale partners to focus on their own channels. Retailers will offer more favourable terms to brands that can draw customers to their stores or website.

Hay still works with some retailers, including Shopbop, Browns and MatchesFashion. The relationships she’s maintained are on less risky terms than before. Some pay a 30 percent deposit before receiving her product, for example.

The ultimate conclusion is direct-to-consumer.

Since the start of the pandemic, Hunting Season also trimmed its roster of wholesale partners. It’s asking stockists to pay upfront before collections are shipped. Corona said she also refuses to take back unsold inventory.

At the end of the day, however, the safest bet is to bypass retailers entirely by relying on a brand’s own e-commerce channel.

“The ultimate conclusion is direct-to-consumer,” said Lena Baranovsky, partner and chief operating officer at Hunting Season.

Related Articles:

How to Build Wholesale Relationships Without Getting Squeezed

Is There Hope for Wholesale?

How to Go From Wholesale to Direct-To-Consumer


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