In the wake of the most devastating period in modern American retailing history when the coronavirus pandemic shut down more than two-thirds of the stores in the country, the way retailers pay their suppliers has changed dramatically – perhaps irrevocably. As such, any remnants of what was once called a partnership but has been deteriorating for a long time are about to vanish completely.
With their stores mostly closed and only e-commerce (for some) to generate revenue, many large national retail chains changed their payment terms, going from the traditional 30 or 60-day arrangement to 90, 120 and, in some cases, even 180 days in which to pay their suppliers. These were arbitrary, rarely-open-to-negotiations and often open-ended moves by the retailers. And while vendors could certainly understand their customers’ need to conserve cash and manage their money, it was the one-sided aspect that has really caught them off guard.
Retailers Make the First Move
It began with retailers shutting down their stores in early to mid-March and saying they were canceling all future orders. That morphed into, “we’re not accepting any more incoming orders.” Then it became, “we’re not going to be placing any new orders until…whenever.” The final straw was when retailers said they would be holding off paying for existing orders – goods they had received before the shutdown and in many cases sold online or in the stores that remained open – for the foreseeable future. And this wasn’t local independents, hard-pressed for cash and searching their inboxes for federal stimulus checks. This was Macy’s saying it was going to 120 days. JCPenney said it was extending terms, a point that became moot after it filed for bankruptcy last month.
Another sad side effect of the coronavirus economic meltdown is that many retailers have changed their payment terms to their vendors…and it’s not pretty for the vendors.
Vendors who do business with some of these big national chains – and understandably wish to remain unidentified as they would like to continue to do business-have identified Gap, Belk, Kohl’s, Bed Bath & Beyond, Saks, Michaels and, for at least part of this time, the TJX brands and Ross – as unilaterally extending their payment terms. Retailers have generally declined to comment on any changes to payment terms.
The Check is not in the Mail
What particularly grieved vendors were the changes in payment terms for goods. Retailers’ online operations were presumably selling vendors’ goods and payments were being collected, providing interest-free working capital…for the retailers.
In a story in Forbes.com on the subject, it was reported that the U.K., apparel retailer New Look went even further and told its suppliers it was suspending payments for existing merchandise “indefinitely.” Its counteroffer was that vendors could come and pick up their goods if they wanted.
Another British retailer, Arcadia Group, which owns Topshop among other brands, took its terms to 90 days and told its suppliers that “we are able to cancel any order at any stage,” saying it was “not responsible” for any of the costs associated with producing the goods.
And according to research by the Business & Human Rights Resource Centre reported in Souring Journal, “Nearly half of the world’s leading clothing brands have yet to publicly claim financial responsibility for finished garments,” an astonishing tally that shows the scale and enormity of this payment problem.
Of course, not all retailers went this slow-pay route. The big two discounters, Walmart and Target, which remained open during all of this and reported solid business, have not changed their terms according to vendors. Others, like Nordstrom, have also stuck to their original payment agreements.
But the number of retailers putting away their checkbooks for the time being is rather lengthy. In a recent Retail Dive report, Dennis Cantalupo, CEO of Pulse Ratings, said, “We have compiled a growing list of 30+ retailers who have sent communications to suppliers dictating new payment terms. What is surprising is that some very healthy retailers have extended terms, which we feel places an unfair burden on their supplier partners who are also desperately trying to manage cash flow during this crisis.”
Imbalance of Power
Hey, the imbalance in the business arrangement between retailers and suppliers has been apparent for decades. As retailing companies got ever bigger, their vendors had less and less leverage. Any references to a partnership were pretty much illusionary, but there was a certain understanding that both sides needed the other and putting someone out of business was not in anybody’s best interests. Retailers pushed and vendors learned to work around the pushbacks.
But this time is different. It’s taking advantage of vulnerable companies at a time of a global economic crisis and it has the potential to forever upend whatever was left of the civility in the seller-buyer relationship. It’s why we’re going to see some fundamental changes in how this business is done. Vendors are going to ramp up their efforts to go direct to consumer, bypassing the retailer, either with their own stores or online. Retailers will increase the percentage of their goods that are private label and developed internally. And any trust level that was once there between both sides will continue to erode.
And that’s not all. These new payment arrangements are going to back up all the way the supply chain to the actual manufacturers of all these goods, primarily located in Asia. We may have a vision of these giant government-owned factories, but the reality is that the ones who will really suffer are the low-wage workers in sweatshops in Bangladesh or Sri Lanka and not just in China or India. Even in the two big countries, the cottage industries that produce so much of what America buys is much more widespread than many people think. This can become a global tragedy, not just one limited to large American corporations.
It’s one more casualty of this tragic pandemic that will be long-lasting and impactful. And there’s no vaccine that’s ever going to cure it.