Posted October 26, 2016
By Larz Soper
You have finally made it! After years of trying to get your foot in the door, your goods and services are finally being purchased on a regular basis by that large, elusive retail chain your company has been pursuing for years.
Now that you’re in, sales have increased dramatically and it’s just a matter of making darn sure you keep the account – no matter what it takes. Landing a national recognized retail account feels like hitting a gold mine. Or is it?
Last year, Target Canada, a subsidiary of the retail giant Target Corp (TGT), unexpectedly filed Chapter 11 bankruptcy. There was no notice, there was no warning. Right until the bankruptcy filing, Target Corp had consistently posted positive consolidated financials. Suppliers were getting paid like clockwork. Business was good.
Target Canada represented the “know unknown,” begging the question “would Target financially back its subsidiaries?” While no one knew for certain, and there were no cross corporate guarantees in place, most all assumed the financial strength of the parent company would trickle down to its subsidiaries. After all, Target couldn’t possibly consider not paying vendors from one subsidiary and risk not receiving products from those same suppliers to its other subsidiaries, right?
After the Target Canada bankruptcy filing, one of the country’s largest factoring companies was asked why they only took a $4.5 million loss from Target Canada, their response was “because no one asked us to factor more.” The notion that large companies are immune to failure simply because they are large and pay on time is a dangerous one.
We have already witnessed a rash of large box store chain bankruptcies and business failures in 2016. In March of this year, Sports Authority, Inc. filed for Chapter 11 bankruptcy protection. As if this wasn’t impactful enough, Eastern Mountain Sports, Inc. and Bob’s Stores, LLC have also subsequently filed for bankruptcy protection. The hits seem to keep coming. Just last month, Texas-based retailer Golfsmith International Holding also filed for Chapter 11.
BLOG: Too BIG to fail?
Landing nationally recognized retail account isn’t always a gold mine
In April, Yahoo Finance writer Daniel Roberts wrote an article suggesting that brick-and-mortar sporting goods retailers were in the their “death march.” He cited that while the internet wasn’t a new challenge to the large retail chains, internet sales options were increasingly desirable to consumers. To have any chance of survival, he warned that sporting goods retailers needed to “wake up” and prioritize their online stores. The ability for manufactures such as Nike to offer customizing of its sneakers online, for example, has dramatically changed the way consumers shop.
Lastly, the article sited greater faith in big-name brands that still have very specialized brick-and-mortar stores such as Nike, Adidas and Under Armor, suggesting that despite the migration of shoppers to the web, there is increased appreciation for elite sports brands niche stores as opposed to a “carry a little bit of everything” approach. Of note, Nike, Adidas and Under Armor also have sophisticated online shopping hubs to complement their specialized retail locations.
Most recently, USA Today published an article reporting that Bass Pro Shops has reached a deal to acquire Cabela’s, both of whom are outdoor sport hunting and fishing supply super stores. The article mentioned that Cabela’s had essentially put itself up for sale at the urging of the Elliot Management hedge fund, which had declared the retailer undervalued and called on the company to consider a sale or reorganization. The article cites Cabela’s lost market share to smaller nimbler competitors and online retailers.
What does this mean for future sales to large brick-and-mortar retail chains? It’s anyone’s guess, but vendors need to caution against a false sense of security because they sell a large retail chain that currently pays promptly. As a precaution, suppliers can build large bad debt reserves.
However, this tactic can result in tying up much needed cash for operations and growth. Selling on COD or on limited credit terms is a seemingly safe approach that may at the same time result in reduced sales or in the extreme case, loss of a customer.
So what do you do? One thing is abundantly clear: Unless your company can comfortably absorb a loss from one of its largest clients without impeding future operations, then you shouldn’t make the sales. Of course, few companies have the discipline to walk away from revenues often despite the associated risk. Regardless of your ultimate strategy, it is important to keep in mind that no company is too big to fail.
For answers to this critically important question or any others you may have, please contact Larz Soper, expert credit advisor by email here.