Retail Amid COVID-19: Factoring & Purchase Order Financing Are the Best Options

There is no denying that the COVID-19 pandemic has been devastating for the retail sector, which was already undergoing a drastic transformation before the virus hit. However, there is an opportunity for companies to transform and ultimately better position themselves for the “new retail paradigm.” Sydnee Breuer and Paul Schuldiner of Rosenthal & Rosenthal explain this new paradigm and how factoring and purchase order financing can help companies get to the other side.

BY SYDNEE BREUER AND PAUL SCHULDINER

COVID-19’s economic impact can be seen everywhere right now. Every industry, region and company — no matter their size or specialty — is feeling the effects of the pandemic. Some sectors have been harder hit than others, but retail has experienced what The New York Times recently called a “crushing blow.” With retail sales falling 16.4% in April — the largest monthly drop on record — total retail purchases (both in store and online) were the lowest since 2012. Sales across nearly every category dropped significantly, from restaurants and furniture to apparel and footwear.

Retail also is experiencing one of the fastest transformations of any sector right now. We’re seeing that play out every day with store closures, bankruptcies to lay off debt and companies scrambling to shift to solely e-commerce sales as many retail stores remain shuttered. The industry is only just beginning to experience the full force of these sweeping and fundamental changes.

Ultimately, the brands with the appetite, vision and resources to continue to adapt their businesses will be best positioned to weather this storm.

THE CURRENT STATE OF RETAIL

While retail sales were down across the board in April, the industry saw a burst in online shopping, as U.S. e-commerce sales jumped to 49% in the last month alone. The mandatory stay-at-home orders contributed significantly to that spike, with online growth primarily fueled by essentials like groceries as well as household items, including electronics, books and toys. Although online sales were up overall, apparel prices saw the largest monthly drop in years, with retailers scrambling to offload seasonal inventory.

The shrinking retail footprint is not a new development, but the pandemic has certainly exposed the most vulnerable of the lot. Most shocking is how small the retail footprint has become and how quickly. For those brands selling into brick-and-mortar, e-commerce alone has been helpful during this period but still slow to grow. Up until now, e-commerce has yet to prove itself as a dominant channel on its own and it’s still unclear whether e-commerce alone will be enough to ensure the long-term profitability — or survival — of a company that isn’t digitally native.

Amid this crisis, there are countless examples of businesses smartly pivoting to direct-to-consumer and e-commerce channels to help fill the void while brick-and-mortar is constricted. We’ve seen denim brands making designer masks and alcohol distillers shifting production to make hand sanitizers. These new opportunities have created new and different funding and financing needs for manufacturers that need cash to quickly convert their production operations or import finished goods or raw materials from overseas. Many companies are doing this for the first time and are unfamiliar with the many hoops a company needs to jump through to produce these products. With more stringent FDA regulations in place and restrictive prepayment requirements from Chinese suppliers, it’s more important than ever that companies find a financial partner with expertise in these areas. An experienced purchase order funder is uniquely positioned to assist companies looking to seize on these new opportunities in the current climate.

While many companies are finding creative ways to generate sales through e-commerce channels or even modified production lines, there are still many others that are struggling to make that transition. There is already so much competition in the apparel sector, and not every company can quickly shift production to start making masks or other PPE or completely overhaul its e-commerce sales platform. Aside from a lack of funding, many companies also are struggling with significant inventory issues. Most retailers cancelled the majority of their orders for April and May and are only now considering reinstating orders for June. But even then, companies will have to deal with the inventory being mostly off season, outdated and deeply discounted.

DOING BUSINESS IN THE NEW RETAIL PARADIGM

Retail is slowly being revived as states and localities reopen around the country. But even as retailers open their doors, it’s clear that the in-person shopping experience will not look the way it did pre-pandemic. Not every state is reopening on the same timeline, which means companies will have to carefully manage inventory and sales as certain regions will see more activity than others. New considerations and accommodations for shoppers will become more common, including social distancing protocols designed to limit the number of customers in stores.

All of these new measures likely will give rise to a more personalized shopping experience. We’ll likely see a growing trend of curbside pick-ups, appointment shopping and even advanced bookings for dressing rooms to minimize potential exposure. With less crowded stores and less browsing for non-essential items, retailers will have to find ways to make up for the lost brick-and-mortar sales that will inevitably follow. We’ll also likely see new fashion trends crop up based on the changing attitudes and desires regarding how and when people return to work. We’re bound to see much more demand for athleisure, tops and sneakers than we are for workwear, bottoms and dress shoes.

Forecasting this demand will be more difficult in the weeks and months ahead; managing and maintaining an appropriate mix of inventory will be key. Companies will need to keep a close eye on cash flow management and have the right cost controls in place to keep their budgets in check.

Diversification of supplier relationships outside of China will help to ensure that products and raw materials can be acquired, assembled or imported quickly, with fewer restrictions. Companies will be forced to step up their quality control measures and inspections, relying less on factories for those steps. A seasoned purchase order funder can help businesses navigate complex supplier relationships, issue letters of credit in place of risky prepayments to overseas suppliers, and help to fund direct labor costs and materials for domestic manufacturers as well.

Diversification will be especially important for companies as they develop plans to serve their customers in different parts of the country and different countries around the world, which have all been affected differently by COVID19. As regions reopen and inevitably tighten up again, it’s important that companies plan accordingly to get products to the places where they can easily be sold and willingly bought.

The challenges surrounding COVID-19 also present an opportunity for companies to rethink their brick-and-mortar footprints and close non-performing locations. Long-term or restrictive leases may make that more difficult for some, and only brands that are consistently investing heavily in building out e-commerce platforms will be able to do so successfully.

Assessing the creditworthiness of retailers will be one of the biggest hurdles for brands to overcome. In fact, any brand without credit protection coverage heading into the remainder of 2020 and looking ahead to 2021 should be concerned. Factoring is a valuable tool for any brand operating in this environment and selling into retail channels. Not only does factoring help businesses simplify operations and reduce overhead for things like collections and receivables management, but an experienced factor in this environment can help brands avoid bad debt, especially when selling to retailers who aren’t Target, Costco or Walmart.

PLANNING FOR THE FUTURE

While companies continue to feel the effects of this pandemic, factoring and purchase order financing are once again among some of the most essential tools available. Brands simply cannot afford to get caught with inventory or be exposed to bad debt from a retailer. In this environment, one bad season or a brush with a retailer with bad credit spells doom for a brand.

But companies should be selective about which partners they select and only work with those who know the retailers well. However, the continued move toward omnichannel distribution requires a lending source that can also support the e-commerce inventory funding requirements of a business. Experience helping brands operate in challenging environments is also paramount, as is expertise with international trade, navigating complex supplier relationships and negotiating contracts.

The future of retail is still very uncertain. While no one has a crystal ball, it’s becoming clearer that brands must make difficult decisions and adapt if they are to survive this pandemic. The brands that will ultimately thrive in this climate will be the ones that remain flexible, embrace creativity, stay on top of shifting styles and trends, and take steps to understand their customers’ shifting needs and desires — all at a price point based on 30 million or more Americans being out of a job this year.

Sydnee Breuer is EVP and Western Region Manager and Paul Schuldiner is EVP and the Purchase Order Financing Division Head at Rosenthal & Rosenthal.