PAYMENT WOES IN THE CONSIGNMENT WORLD

due_thumb.jpgConsignment is an established retail model in South Africa, but late payments can have a crippling effect on any business. Why do they happen and how do you cope?

There are accepted advantages and disadvantages to consignment; one big disadvantage being the impact it can have on cash flow. According to Grant Blackbeard of Blackbeard & Dare, it is a micro model of owning your own store as it teaches you how to develop accurate costings to cover your expenses and ensure a profit. He said that if the system is not working for you, perhaps you should look to yourself and your business acumen. Both Benita Allen of Chica-Loca and Julia Schaffer, convener of The Show, disagree with this idea. "If the store owner does not market the store well or the staff are not trained properly it is not your fault if you are not making sales. It is not necessarily your fault if consignment does not work for your business," Allen said.

Gina and Caren Waldman of Two (pictured right) have managed to build a successful business using the consignment model. "Consignment does work, but only if everyone plays fair," Gina said. Two's relationship with the Blackbeard & Dare stores has recently soured. "It started last year April Grant asked us to deliver winter stock to the six stores that we were stocking. After manufacturing enough stock for each store and sending it to the head office [150 items per store] we received an e-mail to inform us that three of the six stores were closing. This meant that we overproduced our winter collection."

Blackbeard said that the shrinking of the number of stores was a business decision. "Anticipating the impact that the recession would have on our economy, my business partner, Mark [Dare] decided that we should downsize the business to weather the financial storm," he explained. "Designers don't understand that when you a retail lease you have to pay eight months rent to the centre which can amount to R750 000. Added to this, the retailer only informs you 15 days before your scheduled closing date that you can close shop. This put us between a rock and a hard place – if we let designers know months in advance that we planned to close we would've sat with an empty store but still have to pay rent. The best we could do was to inform designers 30 days prior to closure – this was not ideal but it was not unfair."

Gina said that they thought that the stock debacle was a hiccup in the system and continued to send stock to the three stores. "Consignment is a risk and the minute problems like this develop you should pull your stock out of the store and not supply them again. This was the mistake we made." In January this year Two did not receive any payments from Blackbeard & Dare and this persisted for February and March. "Our stock had been sold, the money was in the business but we were not receiving any payment." According to Gina when you stock stores on consignment there is no space for late payments as it chews into your cash flow. "In April we decided to remove our stock from all Blackbeard & Dare stores and refrain from stocking them in the future." To this day* Two has still have not received any money from Blackbeard & Dare who owe them in the region of R22 000.

"Initially there was a problem with a recon but this was sorted out and on 18 May we received an e-mail saying that we would receive payment for the amount of R22 000 by the end of the month," she said and added, "I think the worst part is that the items sold were marked down to virtually cost price so in retail value R88 000 worth of stock was sold. This R22 000 is purely to cover our costs."

Grant Blackbeard (pictured left) does not deny that there is an outstanding amount of R22 000 owing to Two. "The reason for the delay in payment is because Mark and I have been in negotiations. I am selling my shares in the business to him. Two are creditors and when there is a buy out in a business, all payments due to creditors are put on hold." He maintains that he did explain this to Two but said that he could not freely discuss this with designers because he was bound by a non-disclosure agreement. "As soon as I tell designers that I am pulling out of the business, those that support me could make the decision to pull out of the stores which would affect the profitability of the stores." Now that the negotiations have been finalised, Blackbeard said that all creditors would be paid in full by the next week. "This was a business transaction but unfortunately it did affect some designers. I have always said that you should only enter into consignment if you can sustain yourself because these things can happen."

How does late payment affects the designer?

"We are a small business and I don't think storeowners realise how late payments can stunt our growth and the affect it has on cash flow," Gina said. Allen agreed and said that designers need each payment to fund their next range.  "In some cases a late payment can be all or most of a designer's monthly turn over," Schaffer explained. "It means no income for the designer, no payments to the factories and suppliers who have supported the business. If you are receiving late payments from the owners of these retail outlets then they are using your capital and that little bit of profit, instead of you. This in turn makes it impossible for you to reinvest in the growth and development of your product or business," she added.

According to Blackbeard, when a top selling designer pulls out of a consignment-based store, it is a big financial knock for the retailer. "I understand the impact this can have on a designer's cash flow, but you have no idea the impact this has on a business and the dip in turnover we experience, and it takes some time to find someone who can help increase your turnover again."

due.jpgWhy does late payment happen?

Gina said that she thinks it comes down to not managing the business well. Allen said that it is because most designers are small business owners and are easily intimidated by storeowners so they often do not push them for payment.

Tracy Locke of Image Police said that retailers could at times delay payment if stock is not selling. "It this is the case, the shop owner should inform the designers. It is important to let them know in advance so that they can budget and plan. I always keep in regular contact with my designers – communication between the shop owner and designers is essential."

All agree that communication between designer and retailer is essential, "Everyone has their hiccups and retail is tricky especially in the present tough times," Allen said.

What should shop owners do?

"If a shop owner cannot pay they should be transparent with designers and inform them that they cannot pay the full amount. They should have worked out a payment schedule they then stick to. If designers know what is happening they can budget and plan accordingly; and they can in turn give their suppliers payment schedules," Gina said.

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Locke agreed and said that this is her approach. "People will work with you if you are open and honest. If you ignore their calls and not pay them, designers will assume the worst. And if this is the case, designers should consider pursuing legal action." However, Allen said that this costs a fortune. "What recourse is there for designers who have not been paid? It is really just a waiting game so your best bet is working out a payment plan."

What should designers do?

Locke has a bold approach to business and has said that designers should pull out of the store as soon as there are discrepancies with payment.  However, Allen suggests that you approach the storeowner. "I would send the boutique a mail – it is always best to put your request in writing with the date and time recorded. Follow this mail with a courtesy phone call to inform them that you have sent an e-mail. Give them a chance to pay," she said.

Added advice to avoid chasing late payments

  • Go and visit your stores regularly and check your rail. You will soon see what the regular sellers are. Keep a record of all this information but wait for your first payment before you replenish stock – always keep your first drop of stock in a store small.
  • Do not sign a one-year contract, try to sign month to month – the contract should be flexible. If you cannot sign from month to month then do not sign for longer than three months, this will give you enough time to see if your stock is going to sell in the store and if you can work with the shop owner.
  • If a storeowner or store starts changing contact numbers this is usually a warning sign. You should be able to contact the store and store owner easily.
  • Always chat to the sales staff; they do not have a stake in the business and will freely answer your questions about how busy the store is and how your stock is selling.

*29 June 2009
Add your comment (7)
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written by paixste, July 04, 2009
this is such a crappy topic, as a designer I am intimidated by store owners... after 14 months in the industry, after starting with a business plan (good enough to obtain a bank loan) I finally feel confident enough to ask for my money, but I will still yes ma'am no ma'am even though I know I cant.
I have an approach where if I know a month end is tight I will phone my suppliers and ask for two weeks, although this doesnt always help as I buy mostly COD, I also have my own factory, paying my staff, rent, electricity, water,loan repayments, things I cannot avoid paying.
If store owners could phone and let designers know it would uncomplicate things so dramatically, waking up on the 2nd and still not seeing extra payments showing in your account when your waiting for bulk payments... ouch, its not so nice.
oh, and by the way.... im still waiting for my Portfolio payment... I was told I'll have my money by the 7th of July... lol
When are you allowed to start adding interest, how much (on an overdraft I pay 18%) please id love to know... Because as soon as you mention interest pleople get nasty... if I could add 18% onto that amount I'd be able to buy a pretty decent small second hand car (well, in comparison to my car).
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written by jenjamjar, July 02, 2009
Great article. I agree with Cathy - no payment? Walk with your stock! It's essential to have open communication between store-owners and designers, and if the store owner is having a cash flow problem (which happens to everyone from time to time), let the designer know!! so important to be upfront and honest! Rail hire? I really don't agree with this at all, unless we are talking about the YDE's of this world!
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written by Angie, July 02, 2009
Recent poll on iFashion:
Before I started my business I compiled a detailed business plan
True 47.2%
False 34%
I don't have a business 18.9%
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written by JQKA, July 01, 2009
I recon that everyone should look at themselves first before they point fingers. Firstly, i can't understand how it possible for shop owner NOT to pay the designers. Surely, there business model (which by the way, I think is everyones biggest problem) should have allowed for this kind of thing. When you set up a business model you always work on the worst case cenario and then some. This is how you make money. Expect the least and when you receive more, it's a bonus. As for the designers, I honestly believ, again, that they never set up a proper business plan before they start drawing there pretty pictures. There are so many thing that you have to allow for in one range before you come to a final price. You have to even allow for ,again, worst case cenario, being, 60-90day payment period. This is how you will not be disappointed and it can be done. I also want to just say that everyone should see this as their businesses. No one can start a business with R20,000.00 (and if you can, good for you) R20,000 will probably only allow you to supply one store with a very small rail space. Don't try to fly before you can walk. Never cut your budget fine, because you will be disappointed. Rather preapre for the worst (calculated into your business plan) and should you get paid at 30days, well hell, that's a big bonus, but atleast you prepared yourself.

PS: I would like to know how many designers even know what a business plan is? No one prepares them for business. They are only prepared to make and manufacture beautifull clothing.
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written by AmandaLeighOC, June 30, 2009
This is a post at fashion-incubator.com called The Consignment Trap. http://www.fashion-incubator.c...ment_trap/

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written by AmandaLeighOC, June 30, 2009
I've been wondering about the service level agreements (?) between designers and retail stores that operate leased-out rail space. I'm not quite there in our business planning so I've done little investigaton into it. Would be interesting article.

One of the points made (in other forums) about consignment models (and would apply equally to hiring rail space) is that goods are shop worn. So even if they are returned they're not in any state to be sold; at least not at full price.

With respect to Two having produced excess stock for their winter collection - I'm curious as to with whom the decision lies as to what is produced. In a model where a buyer would place an order to be supplied on consignment basis I believe that one should be doubly cautious - because the risk for poor stock selection (by the buyer) then effectively lies with the designer. That said, the buyer would be better placed to know what has sold in their store before. It's an odd mish-mash of business models these mini-stores within stores.

Retailing is an entirely different discipline to the design/manufacturing side of the business. A retail store would need to develop its own brand identity, carve out its niche and then make sure the stock mix is right (and much else too!). So to what extent do boutqiues that operate solely on consignment basis/rails for hire control what merchandise is in the store?

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written by cathy, June 30, 2009
Well written artilce and revelant in the market place today.

We also need articles about new stores opening and calling on Designers to HIRE rails from them at silly prices....can these companies actually deliver? Can they give the small manufacturer's garments the attention they deserve...ie. when someone oversized trys on a garment that is evidently too small for her/him and rips the seams? Who pays - Who repairs - who loses?

The model of YDE is not easily replicated - it was a unique business model that worked, as the owners of YDE were passionate about making a success of the business...it was light years ahead of its time - and now everyone is attempting to be a copy cat...

YDE is now surviving because of sound management practices, good ethics and hard work - not everyone drives lush sports cars out of selling frocks....!!!

I always advise Designers going out there doing it for themselves, to take care, make sure your money comes in at the right time, if not - walk with your stock...as those designs will not sell next season...make another plan






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