BrainTrust Query: How will CIT’s Bankruptcy affect retailing?
By Ted Hurlbut, principal of Hurlbut & Associates
CIT Group filed for bankruptcy protection on Sunday after spending
the better part of 2009 trying to avoid just that. The filing was “prepackaged” in
that CIT’s creditors have already agreed to a restructuring plan that, in
theory, will allow the company’s business to go forward largely intact and
allow the company to emerge from bankruptcy relatively quickly.
Nevertheless,
there were concerns about the impact on retailers in the near term. The Associated
Press reported, “Craig Sherman, vice president
of government affairs at the National Retail Federation, thinks the industry
‘dodged a bullet on the holiday season’ for the most part, because most merchandise
is in stores’ distribution centers. However, he said CIT’s woes could throw
a wrench in ordering for the important 2010 spring season.”
The concern for
independent retailers is not primarily on the impact that the CIT filing
might have on them directly. As the AP story noted, CIT provides financing
for “2,000 vendors that supply merchandise to more than 300,000
stores. About 60 percent of the apparel industry depends on CIT for financing.”
For
independent retailers, many of whom have worked through financing challenges
over the past several years, the impact of the CIT filing is likely to
be felt most as disruptions in supply from their vendors. Already this
season, many vendors to independent retailers have significantly narrowed
their lines and tightened availability, both due to the uncertain retail
environment and difficulties obtaining credit. CIT’s filing very well may
make obtaining financing even more difficult for many vendors.
Independent
retailers need to take this into account as they look to Spring 2010. Any
merchandise that they seek for delivery the balance of this year is likely
already in vendors’ inventory or in-transit. Looking forward, however,
many vendors may find that pre-sale levels have to be significantly higher
before they can justify committing to manufacture, even after further narrowing
of lines.
This puts added burden on independent retailers to be sure that
their pre-season orders are actually going to be produced and delivered.
Independent retailers may further find their vendor base narrowing in unplanned
ways, creating the need to re-source key items, programs or categories.
Even in a sales environment where liquidity is crucial, and pre-season
commit percentages need to be managed closely, strains on the vendor base
may dictate that more liquidity be reserved for immediate, in-season, on-the-floor
goods.
Independent retailers need to be in close communication with their
key vendors as they plan and prepare for 2010. They need to keep their
ear to the ground for any possible impact on the availability of merchandise
and be prepared to act quickly, if necessary.
Discussion
Questions: How do you think CIT’s bankruptcy will affect the retail
supply chain? What precautions should large or small retailers
be exploring to brace themselves for any potential credit tightening?
How will it affect vendors?
Overall, it simply lessens everyone’s confidence in economic recovery and adds fuel to theories that the commercial credit bubble may burst sending us into another recession.
If you drill into retail specifically, it’s kind of a domino effect–no credit, no manufacturing; no manufacturing, no goods; no goods, fewer sales opportunities; fewer sales opportunities, less consumer interest; less consumer interest, lower sales; lower sales…well you get the idea.
I would like to see vendors and retailers work together to overcome this challenge. CIT is a big player and their downfall will affect the supply chain but with planning and partnerships, retailers and vendors can get through this bumpy road. Obviously there will have to be concessions on both parts and it will be interesting to see chains like Walmart and Costco loosen up their vendor stipulations and obligations. The apparel category needs this like another hole in the head.
Successful companies are working to collaborate with vendors. Independent retailers need to do the same whether the vendors are the manufacturers or intermediaries. If an unsettling situation creates the dynamic to move independent retailers in this direction, it could be a good thing.
The timing of the filing has made it easier for retailers to find alternative sources of capital. Same with their suppliers. If it had happened a couple of months ago, it would have been far more damaging.
The bankruptcy announcement is the formalization of a very tough credit environment for the independent retailers and small/start-up vendors over the last year or so. While I’m sure there will be some fallout from the actual bankruptcy, my guess is that most have already adjusted, found other sources of credit, and/or simply gone out of business.
This is, without a doubt, the toughest retail environment for small retailers and vendors that any of us have ever experienced. Add in high unemployment and the potential of increased taxes and potentially higher health care costs and you’ve got a Darwinian situation.
The best way to deal with this situation, for all retailers big and small, is to move beyond the “zero-sum,” adversarial relationships with the vendor community and work towards a “win-win” partnerships with better collaborations, joint planning, improved transparency, and shared goals.
Retailers will see limited impact as a result of the CIT bankruptcy in the short term and in the long haul, other financial providers will rise to fill the void, provided that they don’t get an over-regulated formula coming out of Washington.
A larger concern should be the sloppy way that Treasury Secretary Geithner packaged the U.S. Government loan–he put the Treasury at the tail end of creditors, even though the Feds were into a $2.5+ billion loan as the “last man in” — thus, the American taxpayer is going to take the heavy brunt of this failure.
The loser here is the American consumer. Simply put, a bad deal for the taxpayer.
They did not file the factoring business…so as long as the prepack goes through quickly, it shouldn’t be an issue.