Many of our nation’s retailers are caught in a vise. On the one hand, retail sales have weakened as spooked consumers have quit spending. On the other, their suppliers are finding their access to credit — supplied by companies called factors — is being curtailed.
Factors are companies, typically owned by banks, that provide financing to retail suppliers, be they apparel makers, sporting goods manufacturers, or what have you. Consumer products makers rely on factors when they have supplied inventory to a merchant, but don’t want to wait to get paid. Manufacturers sell their receivables to factors at a discount, enabling the manufacturer to maintain its cash flow. Naturally, factors want to be repaid so they keep close tabs on the credit worthiness of retailers. In today’s tight credit environment factors are becoming increasingly cautious and stingy with their lending. Without the liquidity supplied by factors, manufacturers may stop shipping to troubled retailers, leaving bare shelves in many stores.
Indeed, the situation can be dire for merchants like Mervyn’s, which filed for Chapter 11 bankruptcy protection in July. The company, which was having trouble paying vendors, was said to be a victim of factors that stopped funding manufacturers supplying its stores.
A new study by the accounting and consulting firm BDO Seidman reveals just how serious and widespread the current credit squeeze is for retailers. A telephone survey of 100 CFOs at leading chains nationwide conducted in August and September reveals that 41% of US retailers are experiencing a tightening of credit by their lenders. Also, more than a third of the CFOs report a reduction of planned inventory purchases for 2008. What’s frightening is that the retailers surveyed were among the largest in the country, with revenues of more than $100 million. So it’s not just a few troubled companies feeling the pinch.
The repercussions for employment are grave. The BDO survey found that nearly a third of the top 100 retailers are implementing layoffs in 2008. Store closings, which can’t help the commercial real estate market, are another consequence: 36% of the retail CFOs say that they have, or will, close stores this year. (More than a quarter say they will shutter more stores this year than they did in 2007.)
As most US retailers are supplied with inventory from overseas, reduced spending here threatens economic growth in developing countries, notes Doug Hart, a partner at BDO Seidman.
Taken all together, it’s easy to see how the cascading effect of tight credit could lead to a global recession.
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