The Evolving State of the Retail Sector in 2023 and into 2024

As we near the end of the year, Megan Flaherty and Ying Yang of Rosenthal & Rosenthal explain how new supplier relationships, improved inventory management and more diversified sales channels are transforming the retail landscape and providing opportunities for factors.

By Megan Flaherty, Senior Vice President and Underwriting Manager, and Ying Yang, Senior Vice President and Director of Business Development, Rosenthal & Rosenthal

At the outset of 2023, businesses were optimistic that they had seen the worst of the impacts of the COVID-19 pandemic and that the lingering challenges in its wake had finally subsided. There was a glimmer of hope that the economy would stabilize and that the retail sector would regain some of the traction it had lost. Unfortunately, even though supply chain disruptions have eased and logistics challenges have generally right sided, for the most part, companies are still being hindered by many of the same hurdles that they faced a year ago.

As we near the end of 2023, there is an underlying sense that we will not see the upward swing in the economy and the retail sector specifically that everyone hoped we would. In fact, 2024 is now shaping up to be an extension of the struggles business have continued to endure. Add to that inflation, high interest rates and growing geopolitical unrest and it’s no wonder that businesses and lenders alike are concerned about the future.

The Growing Universe of Supplier Relationships

Even though supply chain disruptions and delays appear to be behind us, and port congestion has improved significantly, many companies are taking the opportunity to continue to adjust and diversify their supplier base, both in terms of number and geographic locations. The goal is to lessen reliance on a select few vendor relationships and broaden the supplier base. Companies have been trying to shift away from Chinese suppliers, especially in light of the Uyghur Forced Labor Prevention Act. There is also a sizable push being conducted to bring manufacturers to the U.S., which has led companies to look to build out plants or facilities to manufacture goods domestically. This will be an interesting trend to keep an eye on heading into 2024.

With these changes afoot, companies are starting to explore new vendor relationships, but many have hit a wall when new suppliers are not willing to extend credit terms to unknown buyers. Purchase order financing is one tool that has proven helpful as companies transition to new supplier relationships because it can fill in gaps with letters of credit for purchases or cash against documents once goods hit the water. In situations when a supplier may not be keen on providing terms initially, this can be a great jumpstart for companies and an effective way to continue business operations without interruption.

 Inventory Management Still Key

Inventory challenges continue to be the thorn in the side of many businesses. Brands are struggling with managing down their excessive inventory while also bringing in the right mix of new inventory, whether through new lines of products or expansion to more high-performing or high-demand core inventory. Companies are getting very creative in their marketing efforts, finding ways to sell their overstock inventory through curated programs with off-price channels, or more interestingly, bundling core or hot-selling products with excessive inventory to market to consumers and retailers. The latter approach rewards companies with better margins, rather than strictly relying on heavy discounts. 

The trend of diversifying sales channels, whether by launching wholesale for direct-to-consumer companies for the first time or broadening the scope of wholesale, is adding to the complexity of inventory management. Companies no longer have the luxury of merely relying on past performance. Instead, they must be tuned into and able to pivot quickly to meet changing consumer demand and retailers’ buying patterns.

Speaking of retailers’ buying patterns, many experienced brands believe that retailers do not do a good enough job of forecasting. For that reason and others, it’s important that brands take an active role in forecasting and not just rely on retailers to do the heavy lifting. Inadequate forecasting can result in an increase in order pushbacks, order cancellations or even running out of best-selling products on the shelves. Some clients blame antiquated systems and methodology that retailers and distributors have historically relied on to forecast sales. But ultimately, the burden falls on brands to be proactive and vocal in the planning stages — for both load-in and replenishment discussions — with their customers to prevent or at least minimize the occurrence of these scenarios. This becomes especially important when brands are preparing to launch new product lines. In these scenarios, brands can lean on partnerships with factors that can lend against both accounts receivable and inventory. The right factor will dig deep into the inventory mix and evaluate even to the stock keeping unit (SKU) level to structure the most flexible inventory facility. It should never be a one-size-fits-all approach.

Diversifying Sales Channels

In addition to more effective inventory management to support wholesale expansion, there is also growing need for companies to focus on customer credit and A/R management. Non-recourse factors can alleviate this burden by providing credit protection and extending guidelines on the credit profiles of existing and new customers so management teams can focus on selling to better customers. Non-recourse factors can also manage, collect and perform cash applications in a more efficient manner, acting as an extension of the operations team. As factors are very close to the collateral, companies will often obtain higher advance rates and availability on A/R that banks and asset-based lenders may not be comfortable with, including international A/R or significant A/R concentration. It’s a good reminder that being nimble in this uncertain environment can be a competitive edge.

The Banking Landscape

Major U.S. banks, regional banks and other financial institutions have been cleaning house, clamping down on their credit parameters and making it more and more difficult to access capital. While this credit crunch started a while ago, the impacts are still reverberating across the retail sector and have resulted in even long-standing relationships being asked to find new lenders. Add to that ongoing inflationary pressures that continue to impact business’ bottom lines and a looming recession that has retailers on edge, and it’s clear that many companies would benefit from a serious review of their financing and capitalization strategy. In today’s uncertain environment, a more flexible working capital debt facility through factoring can be an attractive option and worth exploring.

Looking Ahead

Not all is doom and gloom, as consumers are still spending money. But the question is where that discretionary spending is going. There have been continuing upticks in consumer demand in health and beauty, food and beverage, and other wellness-focused product categories. This also means that there will be heightened competition as more new entries flood the sector. Forecasting, maintaining high performing SKUs to meet demand and competing to stay on retail shelves are all difficult tasks that should be top of mind for brands in the year ahead. Focusing on securing more market share in a crowded space should go hand in hand with finding the right financing partner to help fund the next opportunity when it comes knocking.