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May 5, 2020

Supplier crisis shows why retailer bankruptcy laws need reform

In recent weeks a number of global retailers have found themselves in deep waters financially. But when a retailer is declared bankrupt, it has a detrimental knock-on effect on its supplier factories.

In recent weeks a number of global retailers have found themselves in deep waters financially. But when a retailer is declared bankrupt, it has a detrimental knock-on effect on its supplier factories.

Running a business is a hard slog. It involves long hours, lots of stress, lots of responsibility, and rarely time to switch off and relax. Much of the stress comes from having staff to pay and feeling a sense of responsibility toward them, paying other suppliers and in general, acting fairly and ethically.

But not all businesses operate by this rulebook – and it seems that we are not playing on a level playing field in the global apparel industry.

In fact, many of the brands and retailers that operate in the global apparel space seem to have completely torn it up. In the past few years, we have seen several major apparel retailers go bust. What do we mean by this? Essentially, they are losing money – their outgoings are greater than their income. There is no shame in that, and I have sympathy for such companies.

It is what happens next that is the issue.

If the above was my company, if I was losing money, I would do one of two things. I would seek to cut my costs; and I would seek to increase my revenues. And if I could not achieve one or either of those things, I might be inclined to accept defeat and shut up shop.

But for many retailers and department stores, accepting failure is not an option.

Restructuring process

In recent years we have seen the likes of Sears Corp, JCPenney, Debenhams, Peacocks and Forever 21 enter administration or undergo restructuring, primarily because they were not making money. Only yesterday, J Crew filed for bankruptcy protection.

They restructure and in that process a lot of their debts with suppliers are written off. But then they return and the whole process starts again.

This raises several questions. Firstly, if these businesses were failing the first-time round, why are they starting again? Does that failure not send a message to those involved? Why are these businesses being purchased again? Is it because there is a genuine market need for them? Or is it because those private equity businesses involved – and it is nearly always private equity – see a chance to make a fast buck?

In the UK, several retailers have been through pre-pack administrations. My own research suggests the companies that arise out of them – the reborn companies which come out of administration – have a very poor track record.

Peacocks has been in administration before and is likely to enter it again. Peacocks owes my own business a six-figure sum. Will I ever see this money? It is highly unlikely. How many suppliers – creditors – will Peacocks take down with it? Debenhams went into administration, how many creditors fell with it? And what about Forever 21 and JCPenney?

‘Playing the system’

There has to be a better way than this. I understand the issue of bankruptcy and I appreciate that we have to create a climate where business people are prepared to take risk. But there is a huge difference between genuine entrepreneurialism and risk-taking…and rank opportunism or people ‘playing the system’.

As I said earlier, being in business is hugely risky as a supplier. But the directors of many of these retailers seem to be playing by a different set of rules. It is a case of heads you win, tails…you also win. If the business is failing, they simply wipe the slate clean and start again. 

Is there a solution? Laws in the west will not change on these issues – that much has become clear in recent years. Therefore, the answer lies with us as suppliers. We cannot keep giving credit to what I term ‘zombie’ companies – retailers that have been in administration or through a restructuring. Tighten their payment terms or make them pay half up front, half later. If we give them credit there is a very good chance we may not see it again, so just don’t take the risk.

All of us collectively as suppliers need to think about these issues, now and beyond Covid-19. It’s all well and good getting business and orders in, but these orders are useless if we don’t end up getting paid for them and they potentially take our companies down.

This is the playing field we are on these days – a field where different rules apply and where, for many of our customers, failure is never allowed to happen. We have to behave accordingly and take strong steps to protect our livelihoods in future.

About the author: Mostafiz Uddin is the managing director of manufacturer Denim Expert Limited. He is also the founder and CEO of Bangladesh Denim Expo and Bangladesh Apparel Exchange (Bae ). 

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