LONDON, United Kingdom — One of the first lessons I teach my students at Central Saint Martins is that fashion is a cash flow intensive business. Even when a fashion start-up is humming along nicely, there are still very long periods, during each season, when no money is flowing into the business, but many costs are being incurred. Even in the best case scenario, it can be up to six months after first incurring the costs of producing samples, putting on a show, ordering fabrics and manufacturing a collection before these young labels are actually paid the money that is owed to them by stores that have placed orders.
Combine long payment cycles with rapid growth — especially in the early years, fashion businesses tend to grow very quickly, sometimes doubling revenues each season — and it becomes a very delicate situation to balance indeed. If these cash inflows and cash outflows are not managed extremely carefully, even very talented designers, with high-potential businesses, can go bankrupt, because they simply can’t pay their bills or their staff.
So, it can be debilitating for young designers when retailers don’t pay on time. But according to several conversations I have had, some stores are taking an unacceptably long time to pay their bills. Even some of the industry’s most prestigious retailers — including celebrated London concept store LN-CC and Corso Como, the renowned fashion boutique in Milan — were named by multiple sources as being very slow payors. Other retailers, especially those from international markets including Italy, Russia and Greece, were identified as being amongst the most problematic, requiring extra care and caution.
Corso Como Milan did not respond to an email requesting comment, but to their credit, LN-CC was very open to having a dialogue on these reports of slow payment. Fraser Harper, the company’s chief executive, said: “I think there is a misconception that we are this great huge juggernaut. We are not. We aren’t even two and half years old yet, and the speed of change in the organisation is fast. We want to obviously engage with everybody’s staff, suppliers, customers, in a really, really positive way, and that’s part of our culture."
“There have, on occasion, been some cash squeezes and these have happened more than once,” he acknowledged, while adding “we want to be responsible purchasers and we want to be a responsible retailer, and we have a track record of exactly that.”
But slow payments are not the only issue facing young designers. According to several sources who spoke to BoF, a slew of big-name department stores, concept stores and online retailers have reportedly been squeezing designers on payment terms. One internationally known London-based concept store has reportedly been asking designers to pay on "net 60 days" terms (and then stretching this out to 75 days), while others have been asking young designers to sell to them on consignment. Consignment means that designers get paid nothing up front and only receive payment after the clothes have sold, forcing young start-ups to bear 100 percent of the risk of items remaining unsold at the end of the season. This practice also creates a severe administrative burden for these young businesses, forcing them to constantly track sales and chase accounts for payment once garments have been sold from the shop floor.
To dig deeper into the issue, BoF contacted several major retailers around the world to learn about how they work with young designers. When asked for details on their payment terms, a spokesperson for Colette in Paris said "we work with young designers, but not on consignment and we pay net 30," while Joyce in Hong Kong said they occasionally work on consignment, but usually pay 30 percent deposits on "net 30 days" terms. But most other major retailers declined to comment or did not provide clear or timely responses to our questions.
So how do young designers find themselves in this troubling position in the first place?
These issues are so sensitive and young designers are so concerned about the ramifications of speaking out against powerful retailers that most declined to speak about the issue on the record.
“These stores have these big reputations and [as a] small designer, you feel super honoured because they are coming to you. They are going to make a nice order. When you request your deposit and you don’t get it, you email and you email but they don’t respond because they don’t want to pay that deposit,” explained Valery Demure who works with many top jewelry and accessories brands, describing how it feels to be a sought-after young designer. “So basically, you produce the order anyway because you really want it in [those stores]. You contact them, and they ignore you. What do you do?”
Recounting one such experience with a very slow payor, a rising London-based designer, who asked not to be named, said: "It had a huge effect on me last season. I was very clever about the way I strategised the cash flow, but everything was timed so closely that when a mill had a three week delay on a fabric and I wasn’t getting paid, I was quickly able to do the math [and realise] that if something doesn’t change, in three to four weeks time, I’ll be gone.”
“At the beginning, you are in an awkward position,” recalled Peter Pilotto, one half of the eponymous London-based brand that has quickly built a business of substantial scale. Still, Mr Pilotto remembers these kinds of problems from the early days of his business all too well, saying he has been forced to stop working with several “prestigious accounts” due to very slow payments. He declined to name the offending stores on the record.
“On the one hand, you are so happy that they have placed an order, but then they don’t pay you, which creates a chain reaction because you have promised your manufacturers that you will pay them when the stores have paid,” he said. “It’s a terrible situation.”
Indeed, designers can remain in a state of constant cash flow crunch for years and years, until they are able to secure lines of credit from their banks, or external investment, to provide financial cushioning from the dramatic ups and downs that are symptomatic of the fashion cycle. In the mean time, smart designers must insist on clear payment terms and up-front deposits to ensure that they have enough capital to pay their manufacturers and their staff.
“We’re very careful with the payment terms we secure, particularly on very young designers. Deposits are often necessary in order to fund production,” said Maria Lemos, founder of RainbowWave, a highly-regarded showroom in London that works with some of the capital’s top emerging fashion brands, including Peter Pilotto, Ostwald Helgason, Marios Schwab and JW Anderson.
“The problem is that young designers are often required to sell their own collections and because of their lack of experience they accept terms that are risky for their businesses. I think what they need to know is that it’s better not to take an order, than to take a risky order. That’s my advice,” Lemos added.
Ms Demure agreed, advising: “If you’re confident with your product; if you know your product is good and you have respect for it, and respect for your business, then don’t let it go too easy with stores. If I am going to do orders [on] consignment, I need to find stores that will give me the visibility, who are going to present my product properly, who are going to be behind it. You need to [have] conditions. It’s really a negotiation. Don’t be too kind. Be very business-like and professional.”
This firm, take-it-or-leave-it approach seems to work. Mary Katrantzou, who said she has not faced too many payment issues, told me that in the first few seasons she insisted on 100 percent payment in advance, before shipping orders. “We were very rigid,” she said. “There was no other way we could make it work from a cash flow perspective.”
But even reasonable payment terms that are agreed up front, can slip after a few seasons. “Whatever payment terms you negotiate from day one, you’ll never get a better deal that that,” observed Matthew Harding of Palmer Harding, a London-based label founded just a few years ago. “They’re always trying to push for more lenient terms,” making it harder and harder to manage cash flow as the business grows.
But there are always two sides to a story.
“Designers also need to understand and respect the contractual agreement of sales. They need to respect delivery dates and ensure quality and fit of product,” said Ms Lemos. “The problem the retailers face is that when they deal with young designers they are taking a risk: they are never sure that deliveries will be timely or that production will be up to standard.” Late deliveries can be very damaging to sell-through rates, a key performance metric for fashion retailers.
Five years ago, buyers used to tell me they were hesitant to pay deposits to London designers, who had a widespread reputation for delivering orders very late and often at quality levels that did not match the samples. In some cases, they received orders that reeked of smoke or were covered in dust and filth and were in an unsalable condition.
Though this seems to be happening less frequently now, it remains a problem. Mr Harper of LN-CC explained that they have received and accepted deliveries as late as two weeks before the start of the sale period from certain designers who couldn’t sort out their production on time. “Where other retailers would have cut it and cancelled, as far as I’m aware, we’ve never cancelled an order and we’ve always honoured the payment,” he added.
One thing everyone seems to agree on is that defining and adhering to very clear payment terms, with some portion of the payment before delivery, as well as ensuring clear communication on both sides of the table, is crucial for building productive commercial relationships. The problem is that no clear standards exist and even when clear terms are in place, they are sometimes flouted.
“On several occasions I have seen designers' cash-flow compromised because of retailers total disrespect of payment terms. This is unacceptable and can put a designer out of business,” said Ms. Lemos. “A big brand like Prada can take late payments; a young designer cannot.”
“I think the worst thing for young designers is the stores' lack of communication with regards to payments,” she continued. Emails are unanswered, and phone calls go unreturned, leaving designers completely in the dark about when they might receive payments, which can often lead to stress, if not panic, about keeping the business afloat.
“Write an email, pick up the phone, speak to the person, and say 'Listen, I’m really tight this month, I’m going to do everything I can to get it over to you.' At least that keeps the ball rolling and keeps the dialogue going,” said another London designer who asked not to be named, but said he had to literally walk into one stockist himself and ask the sales staff for a status update on his payments, after discovering that most of his garments had sold out.
Mr Harper of LN-CC also believes that having good communication and a clear payment plan can help to avoid such problems. “[Sometimes] we have a 20-week payment plan and we will often start that long before delivery, so [designers] are accumulating a bit of a deposit beforehand,” he said. “It’s completely trustworthy and we have a great relationship and they are the [labels where] the orders really grow much more significantly and we do try and work in a much more creative way with them. Those [that] operate in more of a partnership fashion, obviously, will get priority in times of a squeeze.”
Ms Lemos said London designers could take a page from their American peers, who often work with invoice factoring companies to vet and underwrite their invoices. “What I see in their approach is that anyone who doesn’t pay the deposit from confirmation is cancelled and we are talking some seriously good stores,” she said. “And while it could be that you can lose a few stores in season number one, by season number two [if] the stores still want the brand they will pay promptly. It makes people behave."
But perhaps we need to go even further than this. It seems to me, based on more than a dozen conversations I have had about this issue with people on both sides of the debate, that many stores are indeed leveraging their power to negotiate terms which are extremely challenging (or unfeasible) for young designers and, ultimately, detrimental to their businesses.
BoF obtained access to a set of strongly-worded email exchanges between one London store and a young designer, where the buyer threatened to drop the collection entirely unless the designer continued to work with the store exclusively, despite the fact that the designer had already done so for six seasons.
These kinds of bullying tactics, along with chronic late payments, are a scourge on the fashion industry and must be stopped.
While the responsibility for negotiating acceptable terms lies squarely with the designers and their agents (this is part of running a business after all) there should also be clear guidelines in place, so retailers can’t arbitrarily throw their weight around, leading designers to suffer terms that most reasonable businesses would find unacceptable. It is simply not ethical to build a business this way, especially when young designers are at such an early stage of their development.
The British Fashion Council (BFC) has already negotiated a cascading scale of standard rates for models walking in London Fashion Week shows, based on a fashion brand's annual revenues. Perhaps it’s time for the BFC to establish a similar set of standards, both for payment terms and delivery schedules, that will help to ensure that designers and retailers alike uphold their end of the bargain and everyone is treated fairly.
If retailers, both in London and around the world, would like to continue to trade on the cool factor of this city's immensely talented young designers, then they should also be willing to play by a fair set of rules that ensures that these businesses can survive, and thrive, over the long-term.
Updated by The Business of Fashion: In response to a request for comment, on 5 April 2013, Caroline Rush, chief executive of the British Fashion Council, told BoF: “New talent generates media and consumer excitement for retailers and that relationship must be mutually beneficial. The BFC aims to develop guidelines over the coming months, through consultation with retailers and designers, to create a framework for payment terms that ensure wholesale orders make, not break small businesses.”