Bento founder Samantha Hardman's piece on payment terms for designers remains among the top read stories on ragtrader.com.au.
It isn’t the purpose of this blog to get into a long-winded monologue on the financial culture of the fashion industry in Australia (at least not today). What we want to share is the fiscal reality of a new clothing label and the options as far as payment terms go.
When Bento started in April 2010, the first dollars were shelled out to get things going. At first they were minimal – business registration, patternmaking, etc. Then they got more serious – sampling, photography, fixing the patterns that weren’t right, models, lookbooks, trade shows and so forth.
Within six months, we’d outlaid tens of thousands of dollars and production had commenced on the first collection. By the end of the year, we’d also sampled our second collection and photographed that too (goodbye another five-figure sum).
In February 2011 our first collection – Autumn/Winter 2011 was delivered to stores. Some of our stockists chose to make this collection available for preorder and with our support presold more than 50 units at full price, before the items were even available in store.
We have two types of stockists. The vast majority are full-paying (that is, they choose their stock and pay for it and decide how to sell it) and consignment (they only pay for goods retrospectively once the stock sells).
In the first season our full paying stockists were supposed to pay their first instalment on delivery of the collection in February 2011. Several have not. (Even those that presold all those pieces). The consignment stockist pays us at the beginning of each month for the goods sold the previous month.
Right now, we are producing stock for our second collection (Spring/Summer 2011 – 2012), sampling for our third collection (Autumn/Winter 2012) and chasing payments on our first collection (Autumn/Winter 2011).
The biggest issue with this model is that we have to pay for production and sampling well in advance ( nine – 12 months) of getting paid ourselves. Financially, this is obviously quite a burden for a new business.
The options available as far as payment terms go can be roughly split into three categories:
1. Self-funded production: This is what retailers like Scanlan & Theodore do – pay for what they want to make. The advantage that retailers have is that they start getting paid the day the item goes on the shelves, and their profit is approximately 75 per cent of the price on the swingtag. From a wholesale perspective in payment terms this means the label takes the orders from retailers, produces the stock and then seek payment at some stage after production has finished. This means that the full cost of production is worn by the label and as such the risk – if the retailer changes their mind or goes out of business, they have unallocated stock for which they need to find placement, and they’ve outlaid money for the goods.
2. Partially-funded production: This means that the cost of production is at least partially funded by the retailer the goods are being made for. Most wholesale labels make to order, so this means that the retailer pays a deposit up front to cover immediate production costs and then make further payments at agreed intervals. For example – 40 per cent of the order upfront, 30 per cent before delivery, 30 per cent within 30 days of delivery. This means that the retailer and the wholesaler share the risk – the label hasn’t yet made any money (actually, they’ve made a loss – the production costs have been covered, but not the development costs or the mark up).
3. Fully-funded production: We can’t actually imagine an instance in which this would occur (unless the retailer seriously wanted the label), but in this version of events the retailer pays the full amount of their order upfront – both the cost of production AND the mark up. Realistically though, this means the retailer wears all the risk. If the label goes out of business they’re going to struggle to get their money back, and they’ll be short stock for the season.
It’s no big secret that fashion is an incredibly competitive industry. With this in mind, labels are willing to take ever greater risks – that is, fund production of items with absolutely no downpayment. With substantially fewer retailers than labels and a culture of hyper-secrecy, retailers can get away with being extremely lazy with their payments. Conversely, with far fewer suppliers than labels, suppliers can be excruciatingly strict with their payment terms. As a result, the label ends up acting as the bank for the industry.
Without doubt, if a retailer really wants a label they’ll pay the required deposit, or negotiate terms they can afford. If the retailer however feels they’re taking a bit of a risk on the label or they’re somewhat on the fence about their order, why make a deposit when there are ten other hungry labels who don’t want a deposit just itching to take an order?
Naturally, no one wants to be in a ‘good times’ business relationship – a relationship in which there is no flexibility to account for the tough periods. Likewise, every good business should want to work with their best customers to ensure a mutually beneficial relationship. As we enter our third season we now have relationships with suppliers where they are willing to give us a few weeks breathing space to make payment – but of course this is something agreed to upfront. Moreover, we’ve earned that flexibility by paying very promptly in the past.
What is very clear is that this model isn’t sustainable. If the global financial crisis has taught us one thing, it should be that no business is immune to collapse. Put simply, fashion labels need to toughen the heck up and start operating more like businesses and less like hobbies.