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."
Why 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.
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