Selling to department stores pt.1

Posted by Kathleen Fasanella on Aug 11, 2009 at 2:12 pm / Fulfillment, Newbies, Sales and Marketing / Trackback

It seems that selling to big box retail stores is the pinnacle aspiration for the uninitiated. When anyone asks me how to attract attention from the majors my first thought is “why would you want to?” As with many things, be careful what you wish for; you just might get it. The first question should be, do you really want to sell to chain stores? And if so, to which ones? Let’s do this second question first, it’s shorter.

Which clothing stores do you want to sell to?

I know what you’re thinking, you’ll take whomever or maybe you have someone in mind. Unless you’re doing bridge, I have a better suggestion. For example, in my quality quiz, I asked which of these stores (Neiman Marcus, Nordstrom’s, JC Penney’s) had the best and most consistent quality standards and nobody got the right answer (Penney’s). Don’t get me wrong, I’m delighted if one of my DEs is selling to Nordstrom’s or Neiman’s but if you’re selling to Penney’s, every other retailer will buy from you for that reason alone. I realize few people here have dreams of selling to vanilla Penney’s because it’s not glamorous but it’s a good example of things not being as they appear. At close, I include names of stores small companies should consider before a chunk like Penney’s.

Do you really want to sell to retail chain stores?

easybutton Before I launch into the recitation of what this involves, please know I know you’re not stupid. I know you know this isn’t easy. At the same time, I know everybody is looking for a big red EASY button. There isn’t one other than the one you see over there on the right. People are seduced by the idea of lots of sales in one fell swoop (easy) but it takes a lot of money to do it. Or maybe you’re looking for someone to take you there. That can happen. Either way, there are no short cuts. Read my book and follow those steps. If you’re really serious about it, do more than dream. Make it happen for yourself. Ask yourself this question honestly, if you had all the money, expertise and time in the world, would you take you to the next level? Or would you help someone who was further along? People who are successful and in a position to help you are those who’ve done hard work. There is no easy; strive to be like that which you seek and it will find you.

5 things to know before approaching department stores

You think my site is bad, you’ll have to start reading things like Supply Chain Digest. Selling to big box stores requires a whole other level in both operational and computing complexity. Both require commitments towards increased internal operational efficiencies and considerable financial investment in the necessary tracking and monitoring systems. In addition to the core concepts I explain in my book, these are the biggies:

  1. Vendor compliance standards
  2. EDI -electronic data interchange
  3. Getting paid -Factoring needed.
  4. Discounts and returns
  5. Penalties for non-compliance (chargebacks)

Vendor compliance standards:
Retailers have strict vendor compliance standards because they buy thousands of products and having rules for individual vendors is not possible. Standards start with something as inconsequential as good style numbers (not names), SKUS and compliant packaging. Worse, each SKU must be in its own shipping carton meaning it’s conceivable you have a 100 piece order that would fit in one box but you’ll need to split these up into however many boxes as determined by SKU. Your boxes must be labeled according to strict standards. You can only use designated shippers and can only deliver at a specific scheduled time.

Every retailer has a vendor compliance program which is explained in their vendor compliance manual. I collect these, I have over 200 manuals from various retailers. These are proprietary so they’re difficult to find. I did find one sample (pdf) on the web you can download (grab it before they pull it). I wrote a two part review of a book that is a mere starting point of VCS.

EDI: Electronic Data Interchange
You need complex EDI software that again, retailers will often designate. I haven’t priced the software lately but I sincerely doubt there is a compliant package that costs less than $10,000. My guess would be closer to $50,000. EDI entails more than software. It takes the right hardware, peripherals, web connectivity and dedicated personnel to manage it. EDI is such a heady topic that I can’t even decide which book to buy to read about it. I’m open to suggestions if you have one.

Getting paid -Factoring needed
I realize people think selling to big box stores means lots of money. It can but retailers are very slow pay, typically 6-9 months. Wal-mart, for all its ills, is a radical exception. They pay within 30 days. In other words, if you need the money, you will need to be factored which means borrowing money from a business against the value of your invoices. The kind of factoring you need depends on your industry and the retailer. If you are in an industry that is not apparel related (or your buyer is mostly not an apparel seller), you can get non-recourse factoring which costs 2%-3% of invoice above and beyond other financing costs you may have. If you work in apparel, you’ll need a different sort of factoring which costs 15%-20% of invoice.

Discounts and returns
It is not unusual to have “sell-through guarantee” agreements with large retailers. For example, you will be required to agree that 85% of your goods must sell within a given period. If not, you agree to accept these items as returns. This is in addition to the set discount schedule. For example, your unsold goods are marked down 20% after 30 days, 40% after 45 days etc. If 85% (for example) of your goods don’t sell within the established period, it’s either returned or destroyed. It’s heartbreaking but it sometimes costs less to destroy product than to pay the store to ship it back. Sure, you can offload it in the off-price market but this is yet another layer of complexity resulting in pennies on the dollar for your efforts.

Penalties for non-compliance:
Retailers will issue charge backs, which are penalty fees they deduct from the amount on the invoice if you don’t follow their rules. It’s not like shipping to an individual or independent store. They will levy fees if you put the hangtag or labeling in the wrong place. More if you accidentally ship the wrong colors, sizes etc. Chargebacks can be quite contentious, Saks was sued by their vendors and the SEC brought charges. While not typical, it is not unheard of for chargebacks to exceed the value of the invoice meaning you will have to send them a check to pay your fines rather than vice versa.

Summary:
All of this costs money, lots of money. In addition to your company’s infrastructure, the very process by which you produce goods will radically change. Considering all the costs, you will have little alternative than to produce offshore. If you welcome the change or are already doing it, it will make little difference to you but for others, outsourcing implies much longer development and production scheduling time lines.

Alternatives:
If you find yourself in such position to explore the world of large scale retailing, I do have a few recommendations. Some retailers are small company friendly and will walk you through it. Some of these retailers are Whole Foods, REI and Amazon. I think doing business with any of these retailers amounts to a good training program if you’re seriously considering this option and want to grow internally rather than bringing in an outside consultant or other interests to take you to the big leagues.

Be mindful. Sales are seductive. Whether you go full bore or are satisfied with limiting your sales to independent stores, you need to do the same ground work to improve your operations by adopting standards typical in the industry. If you do that, you can’t lose either way. What’s more, becoming streamlined when you’re small means you become more attractive to investors who can take you to another level if that’s what you want. The good news about improving operations incrementally is that it rarely costs money or if it does, not very much because you get an immediate ROI that covers the cost of the improvement. Whatever you do, don’t become trapped in a system that conflicts with your values or manner in which you choose to conduct your affairs just because the allure of sales is seductive.

Related:
Selling to department stores pt.2 (EDI)
Selling to department stores pt.3 (compliance)
What are SKUs?
What are UPC codes?
How to assign SKUs and UPCs
Do you need your own bar codes?

22 Responses to “Selling to department stores pt.1”

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bente
August 11th, 2009
9:10 PM

Just forwarded this to a friend that most probably will buy your book and join “the team”.
She has a fabulous product (very luxurious) and is targeting Neiman Marcus.

Erika Rodriguez
August 12th, 2009
4:07 AM

This is another great article. I appreciate the truthfulness/bluntness which may aggrevate some but your message is clear. The post gives me many things to think about in terms of my own standards, labeling, and organization. Thanks.

Dawn B
August 12th, 2009
6:48 AM

I have heard the same story from others who have looked into big box store sales. Thanks for a great article Kathleen!

Summer Harris
August 12th, 2009
9:05 AM

Oh Man! This was just in time for me, we just got word from our sales rep that Nordstrom wants to place an order for fall shipment.

If the 100 page “Shipping Novel” from Nordstrom wasn’t enough to make me nervous, this article sure was! Though I do appreciate it very much. It’s nice to have the insider perspective on everything.

Any other helpful suggestions or information from other who have done this would be very much appreciated.

Thanks, as always.

Amy
August 12th, 2009
12:50 PM

Reading this felt like the honest, insightful, and pragmatic posts of the FI of the past…thanks!

Alison Cummins
August 12th, 2009
1:09 PM

Summer,
If you join the forum, which is private, people will be more open and frank about their personal experiences. You can start a thread to ask a question and get a discussion going with multiple members.

Kathleen
August 12th, 2009
2:00 PM

Alison, in her bio in the forum, Summer mentioned that really nasty situation she got into with that sewing contractor whose name I won’t mention here. Boy was that educational. And I was so disappointed! I’d only heard good things about that company up till then. But your point is taken, we should discuss it there. I’m excited to hear Nordstrom’s was interested, always a good sign and a big boost of self confidence.

Amy: if it’s familiar it’s because this was info I’d mentioned here and there (in more detail actually) but had never pulled together in one single topic.

Catherine McQ
August 12th, 2009
5:02 PM

APICS, at http://www.APICS.org, the Association for Operations Management, is a great resource. Find a local chapter and meet people who are involved with EDI, supply chain management, sourcing, and lean manufacturing on a global scale. That will give you an idea of the world that you will be entering if you want to work with major retailers.

Marguerite Swope
August 12th, 2009
6:13 PM

I downloaded the sample compliance manual. Gag me! I never want to have to deal with this. I now have to convince my partner we don’t want to do this. It sounds AWFUL. Thank you for this very convincing example!

Thanks, Catherine, for your link. It’s a world that would require support, I think.

Marguerite

Barb Taylorr
August 13th, 2009
6:01 AM

I have worked with some of the large retailers and offer this advice for those taking the plunge for the first time: Set up one person in your company to work with the customer on all issues. They should find out who their contact at the retailer is, and introduce themself from the get go. Establishing a good relationship between these two people is very important. The person at your company needs to be very organized & keep meticulous track of each step and deadline of all requirements along the way. Any time there is a question or concern they need to get a hold of their contact at the retailer and ask for advice/approval. Do not ask them for advise until you are sure the answer to your question cannot be found in the vendor’s manual or they may (rightfully) see you as wasting their time. While some companies have been much easier to work with than others, I think it is fair to say that the retailer wants to receive a quality, on time delivery that is in compliance, just as much as you want to ship them one. If the contact at your company views their counterpart at the retailer as a partner, rather than an adversary, your odds of success will be greatly increased. Be patient too, it can take several orders to develope a good relationship with a retailer, but once you have the system down it can be very rewarding.

Kathleen
August 13th, 2009
6:48 AM

There was one issue I intentionally didn’t mention in writing this post in an attempt to keep it streamlined and not dependent on current events. The matter refers to factoring.

The largest factor of small to medium sized apparel businesses is a company called CIT. CIT offers a wide range of financial services beyond factoring. The firm is in very serious trouble, many in the industry have been gravely concerned that a CIT bankruptcy would put thousands of manufacturers and retailers out of business (factors also lend money to stores to buy inventory).

That said, the factoring side of CIT’s business is very profitable. Because of that, there are several parties interested in purchasing it. The long and short of it is there may be some difficulties and minimal losses if a transition were to take place but it is not likely to be as devastating to broad swathes of our industry as apparel people have supposed. More details are here.

Audall
August 13th, 2009
11:25 AM

Great article Kathleen. It covers issues that many are unaware of when they intend to sell to mass market. Some of the terms that retailers will try and negotiate, such as guaranteed sales and chargebacks, can turn your business upside down very quickly. For negotiating purposes, the hotter your product is, the easier it will be to gain some favor on terms. And sometimes, it’s necessary to say “no” when the deal really doesn’t make sense. Finally, ensuring that your manufacturing partners are on board and delivering your product in accordance with the compliance rules, can save you a lot of headache and $$.

Thomas Cunningham
August 14th, 2009
1:18 AM

while I agree with the gist of Kathleen’s post that doing business with the big stores is VERY complicated and time consuming, I’d like to add a couple of notes. This refers to my experience working with upper-end stores including Bloomingdale’s (Federated) and Neiman-Marcus/Bergdorf.

Payment — should be between 60 days and 90 days in my experience, NOT 6-9 months. The fewer problems you have with your shipments (i.e. correct use of EDI, following procedures as listed in compliance manual) the faster you will get paid

EDI — you do NOT have to spend $50K to get EDI. I set up EDI for my business for only a few thousand dollars — I used EZCom, which is Web-based EDI interface. I had no chargebacks or issues with my EDI business with Bloomingdale’s using this system.

Doing business with department stores is complicated, but if you take the time to read the manual and comply with what you are told to do exactly how you are told to do it, then you will get paid.

Having said that, the system is not set-up for smaller players.

You will have to decide if it makes sense for your business to enter this environment that is dominated by well-capitalized companies with financial, marketing and operations resources that are not available to D-Es.

Kathleen
August 14th, 2009
4:06 PM

This is very heartening information Thomas in that it comes directly from *you* (I know who you are but I venture most here do not). The info on EZ.com was great and I’ll look into it. I have a question and then a few comments. My question: are you factored? Just curious, you don’t have to answer.

Comments:
Our mutual friend who is a factor (the man who took you out to lunch) admitted to me that it was possible to be paid in 60-90 days as you said but that it was not typical and we all know why. Still, I’m hinging everything on the 60 day thing when I asked him why someone should be factored if they could theoretically be paid in 60 days considering that factors themselves don’t pay until 45 days. The only thing left in my mind was that factoring amounted to a very expensive two week loan, bridging the gap btwn 45-60 days. As such, factoring could be considered a tax one pays for not being prepared. Wouldn’t it be far less costly in even the short term to have it together and cover that two week gap one’s self? Because learning VCS is difficult to learn quickly and unerringly, the fees paid for factoring can also be called tuition.

Another question: What’s the contract term for factoring?

Re: factoring in general I wrote elsewhere but bears mention here. Another downside is factors want *all* your invoices, even those for which you don’t need financing (because the customer pays on time). I think all these accounts should be rolled into the decision making process.

Factoring is helpful beyond VCS etc; factors will have say so over which orders you accept. They won’t let you sell to just anybody. This is good and bad. Bad because they won’t let you sell to an untried retailer who may be up and coming themselves but who will be successful. It’s good because they won’t let you sell to a party known to not pay their bills. As such, factors are a sort of credit checking service for new lines who don’t have the means or connections to know which buyers they can risk taking orders for. But you Thomas have been around and know everybody.

I have noticed a danger tho is saying X thing is possible (or X price is possible) because the uninitiated will look at the bargain basement price and use that as the basis of their expectations. A common example is a DE who has heard some reps are only paid 8% commission (true) and then decide they will only pay 5% (that line folded before they could entice a rep to take their line). Or they’ll hear 12% and offer only 10%. Obviously there’s some correction going on if they go anywhere but as you know, I typically write about what is most common. Likewise, if their expectations aren’t met, it seems too many are too quick to write it off as a penalty one pays for being small and while that’s true sometimes, that is not so often the real reason. Most small people aren’t as prepared as larger entities because they either didn’t come into this with formidable experience (as you did Thomas, particularly in financial matters) and being small, cannot attract the human capital with the acumen needed to exact those discounts or trading preferences.

Another question: Do you (or anyone) know why some retailers *require* you to be factored?

Thomas Cunningham
August 19th, 2009
4:47 AM

Kathleen — sorry for such a delay answering, not sure if anyone will even look on this thread anymore it is so old. Anyway, for what it is worth . . .

1) At my (old) job, we were factored.

2) The contract term is probably better answered by our mutual friend, but I believe 2 years with automatic 12-month renewals thereafter is common

There seems to be a lot of confusion about what a factor does and how they do it. Let me try to clarify based on my own experience.

The factor can do 3 essential things — but each relationship is different and your factor may do one, some or all of these things, based on your needs and their own internal decisions.

1) Collect your receivables. The factor is your ‘collections agent’. Once you have generated the receivable and assigned it to the factor, they will be responsible for getting your customers to pay. The money is paid directly to the factor and then the factor remits the funds to your account, along with an accounting of where the funds came from. You may still have to make the occasional call to customer, but the vast majority of your collections work will go away when you get a factor. The factor can collect your receivables regardless of whether they are lending against them or providing credit insurance (see below)

2) Credit insurance. The factor checks credit for your customers and if the customer credit is approved, the factor will insure the receivable. In other words, if the customer does not pay you for whatever reason, the factor will make you whole. Usually a receivable has to be at least 60 days past the payment window before the factor will make good on the insurance. There are a number of requirements that have to be met in order for the insurance to be effective, so it is important to comply with the factor guidelines all the way through the process to insure that you will be covered in the event of non-payment.

3) Lending against credit-approved receivables. The factor will lend you money based on the value of credit-approved receivables you have assigned to them that they are collecting. The factor is willing to lend you the money because they are collecting your payments, so they know they will be paid first. In addition, they have checked the credit on the receivables (see 1 above) so they have a high degree of confidence that they will be paid. To protect themselves, the factor will lend you only a percentage of the total receivable value. For smaller companies this could be around 60%, but would likely increase after the factor has experience with your collections. This loan is called a DRAW. The draw is available as soon as you have signed over the receivable to the factor i.e. no 45-day waiting period as Kathleen mentions above. The factor will only lend against credit-approved receivables.

So here is the flow of how this could work, for a company that is taking the ‘full package’ of services. I’ll use the name of my old business.

1) Sacque Suit receives an order from a new account: Jimbo Retail. The order is for $20,000.00

2) Sacque gives the order and customer information to the factor, Receivables Specialists. This includes the amount of the order and the SHIP WINDOW.

3) Receivables Specialists says the credit limit for Jimbo is $10,000.

4) Sacque goes back to Jimbo and cuts the order in half. (Could also get $10,000 from Jimbo up front to eliminate risk). Assuming that Sacque ships on-time, the receivable is now insured.

5) Sacque ships Jimbo inside the delivery window and generates an invoice for $10,000.

6) Sacque signs-over the invoice to Receivables Specialists.

7) Sacque immediately draws $6,000 cash down from Receivables (60% of the 10K receivable)

8) Receivables reaches out to Jimbo and collects the funds

9) When Jimbo pays, Receivables pays themselves back the $6,000 (plus interest) that they lent Sacque Suit and then pays the remainder of the money to Sacque Suit.

Don’t know why a retailer would require you to be factored, but it is widely believed that factored accounts get paid by retailers faster than ‘independent’ accounts.

Given the state of the economy today, the credit insurance element of factoring has become increasingly important. It may make sense for some readers of this blog to use a factor for credit insurance and collections without borrowing. Please note, this is still going to cost you some money – the factor will take a fee that is a percentage of the value of the receivables assigned.

Finally, most factors will not restrict you from selling non-credit approved accounts. They simply wont’ lend against them or provide credit insurance for them.

Hope that all makes sense

Ray Shan
September 27th, 2009
11:33 PM

Thanks Thomas for the insight, really enjoyed your comments.

Quick note on EDI – we were able to find a few flexible, web-based solutions that only takes several hundred dollars per client to set up and less than a dollar per EDI transmission ongoing. Most have experience working with apparel/general merchandise retailers, such as Nordstrom. However the ongoing processing/maintenance of account is crucial and will require capital/manpower.

Karen Judge
June 20th, 2010
11:36 PM

Over the years I’ve had a few small stores ask “aren’t you factored?”. I never understood why that would matter to them. But after reading all this I guess they’re thinking that if we were factored then I wouldn’t be asking them to pay when we’re shipping. In other words if we were factored they would automatically get terms like net/30 regardless of whether they were a new account for us.

Which brings me to a question…most of our stores pay via credit card (or COD) when we ship (meaning they do not get terms from us). Do factoring services exist mainly for doing business with large retailers since boutiques don’t always get terms (but the big retailers demand them)?

[...] Selling to department stores pt.1 Fulfillment centers pt.1 Fulfillment centers pt.2 Importance of Product Identification pt. 2 [...]

Selling to department stores pt.2 (EDI)
December 29th, 2011
3:24 PM

[...] Selling to department stores pt.1, I mentioned the advantages and disadvantages to independents who want to sell clothing to [...]

Darcel
June 3rd, 2012
8:38 PM

Hi Kathleen,

I have been reading your book and also spending endless hours reading your posts online since March. Both are amazing, truly wonderful wonderful work and so many things I wish they had covered during my time at the London College of Fashion. After having shown three collections on runway in the Caribbean, I am looking to start production in small quantities from a small sewing room and these posts are helping me so much in planning to make the transition from being an artist who creates nice pieces, to someone with a business mindset. It’s true when they tell you that being a designer means only 5% creativity once you are actually in the working environment.

Thank you, thank you and thank you. The efforts of an individual like yourself to collate all of this material for the love of it and for the benefit of people you don’t even know is in itself proof that there are still good people out there. Thus far, you are already one of the best tutors I have ever had.

I look forward to reading more and definitely see myself having questions in the future! Thank you once again!

Buyers do not determine sales policies
November 5th, 2012
1:39 PM

[...] In the vending relationship, the buyer makes an offer to buy but the seller retains right of refusal. No shirt, no shoes, no service. Every seller has the right to refuse to sell to whomever. Of course the buyer has the right to abstain from tendering an offer but that is a far cry from being able to dictate sales policies. Usually. If you’re over a barrel with all your eggs in one basket in selling to one big box retailer, you may not have the luxury of refusal but that’s another story. [...]

Michael Kotoyan
June 14th, 2013
2:58 PM

Check out Beacon EDI – they offer an EDI solution for the fashion industry for $99 bucks a month. It includes a lot of other Vendor compliance information.

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