Current FlashlightNews Headlines
Translate





FlashlightNews Partners
Cree, Inc.
Bayco Products
LEDtronics, Inc.
Vortex Flashlights

Retailers' Shift Away
From Purchasing Contracts

Buxbaum Group Press Release FlashlightNews.org - 9/24/2007

Bookmark and Share

Major retailers move presents risks to manufacturers and secured lenders


Assorted Flashlights

Assorted Flashlights

AGOURA HILLS, Ca. - Major retailers' widespread shift from purchase orders to less-formal "forecasts" of their merchandise needs is putting both manufacturers and their secured lenders at risk of increased losses, according to Stevan Buxbaum, executive vice president of Agoura Hills-based turnaround investors and consultants Buxbaum Group.

Historically, large retailers gave manufacturers purchase orders that were contractual commitments for the delivery of a set amount of merchandise at a specific time, Buxbaum noted. Now, however, nearly all big chains give their suppliers forecasts of their estimated requirements that carry no obligation for the retailer to purchase the goods once they are produced, he explained.

"Manufacturers are producing goods to the forecast, but there are no guarantees that the customer will take the goods," Buxbaum said. "With nothing but a forecast in place, it's not uncommon for a retailer to buy only a fraction of what the manufacture produced or to stretch out deliveries over a much longer period of time, and the manufacturer doesn't have a leg to stand on."

The problem is especially acute in apparel. "In many cases, those goods carry the retailer's private label, and the chain is not going to want them in circulation," Buxbaum says. "That creates issues. Is the manufacturer allowed to liquidate goods that are produced but not accepted by the retailer? If so, do the private labels have to be removed? Or does the manufacturer have no choice but to wait for the goods to eventually be accepted?"

The shift to the forecast approach is causing problems for secured lenders, as well. "They are lending against this merchandise, but there is no guarantee that the purchaser will take it, and they may be limited in their ability to sell the goods. Lenders need to completely understand the agreements the manufacturer has with the retailer and be willing to walk away from deals whose terms are onerous," Buxbaum advised. "Just because the merchandise exists, that doesn't make it an asset. It is only an asset if you have the right to sell it and recover the money."

Why have manufacturers allowed such a system to come into play? Buxbaum noted that they are typically eager to do business with the largest retail chains and, accordingly, are often willing to do enter such agreements even under unfavorable terms.

In this environment, secured lenders need to stay vigilant if they are to avoid financial losses in such dealings. "There has been a fundamental shift not just in the way merchandise is bought, but in the balance of power," he commented. "Lenders that don't understand that are doing business at their own risk."

About Buxbaum Group

Buxbaum Group had built its reputation for over 30 years as one of the largest liquidators and appraisers of retail and wholesale inventories across North America. While continuing to operate in those areas, the company has shifted its primary focus in recent years to turnaround investing.

For more information, visit: www.buxbaumgroup.com.


Related Stories