Credit - A Supply Chain in Crisis: The Broken Two-Season Business Model

A scarcity of credit and shrinking sales is taking its toll on the outdoor industry’s two-season business model with its long lead times and reliance on credit.

Healthy growth rates have enabled the apparel and footwear industry to overlook the well known flaws of its business model for years. In that model – inherited largely from the snow sports industry – product managers would essentially order, manufacture and ship apparel and footwear to their dealers twice each season. The system tended to push inventory risk onto retailers, who were enticed by discounts to place up to 70% of their orders a full year in advance. In exchange, brands financed the inventory and offered preseason discounts of up to 10% plus dating of up to 120 days for some winter goods.

This system allowed brands to amass orders to meet the minimum production runs of Asian mills. It also gave them time to shop sourcing for the best price. The downside was that the extended lead times meant brands would tie up valuable cash in greige goods and working capital for up to ten months. Conversely, many retailers got in the habit of relying on lines of credit to finance their preseason orders and take advantage of discounts.
The model functioned as long as the market grew and credit was cheap, but that ended in September when consumer spending dropped off a cliff and banks tightened credit. Often under the guidance of consultants, retailers quickly shifted the ratio of their business from 70/30 percent preseason to 60/40 to become more liquid and nimble.

With banks cutting back their credit and sales plummeting, dealers wisely shifted toward buying closer to need. Many have since learned the tremendous power of placing more, but smaller orders. Some are even reporting their best margins in years on significantly less sales.

Outdoor brands, however, could not respond as quickly, since they order goods a year in advance. They are now scrambling to liquidate spring/summer merchandise landed since January, which has further rewarded retailers who have kept their open-to-buy money ready. Reps report the amount of merchandise available at close-out appears to have grown by 25% this year.

“We’ve been managing it by giving up discounts,” said Lisa Hollenbeck, VP and merchandise manager for the Alpine Shop Ltd. in St. Louis, MO. “With cost of money so low, it’s not really worth it.”

This year Alpine Shop has shifted from ordering $2,500 to $3,000 in sportswear every two to three months to bringing in $500 orders every four to six weeks. This lessens the chance of sitting on dozens of tank tops when there is still snow on the ground and also lowers the need for cash. “We are intentionally buying smaller amounts more frequently to keep the stores fresh,” said Hollenbeck.

Last fall, Alpine Shop still bought core product on a preseason basis, but staged deliveries of new colors for late November and early December. Like many outdoor retailers, Hollenbeck said she disregarded warnings that the colors might not be available, figuring she could always find product elsewhere. Besides, she said, there was no guarantee the brand would ship the items on time anyway.

Retailers who have not cut back significantly on preseason orders, meanwhile, are now struggling to pay their bills. At one rapidly growing brand, the number of wholesale accounts 60 days or more past due has tripled from a year ago. Banks typically will not lend against such aged A/Rs.
One brand executive said bank due diligence is now much more thorough. They are scrutinizing the quality of A/R, future orders and inventory more thoroughly. They are analyzing the health of retailers the brand sells to and are also examining retailers’ trade credits to identify what brands might be vulnerable in case of a retail bankruptcy. In some instances, bankers are calling retailers to confirm future orders. That has prompted some executives to tell their reps to stop faking orders. “We are cleaning up that file right now,” said one executive.

Even the most successful retailers, meanwhile, are bracing for higher credit costs. One said he is hearing that while his bank will likely renew his line of credit, it will raise the interest rate by 200 points. He may have to raise prices to preserve margin – a dicey proposition in the middle of the biggest downturn in consumer spending in decades.