Supplier crisis shows why retailer bankruptcy laws need reform
Running a business is a hard slog. It involves long hours, lots of stress, lots of responsibility and rarely a time to switch off and relax. I am not complaining—that is the life I have chosen, and I feel blessed I have been given the privilege to run my own company.
It seems, however, that we are not playing on an even playing field in the global apparel industry. Allow me to explain. Much of the stress I suffer is because I have responsibilities, and I take them very seriously. I have staff to pay and I feel a great responsibility for them. I also have suppliers to pay and I feel a huge burden and debt and gratitude towards them. These are my worries—being fair, and ethical.
Not all businesses operate by this rulebook. 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. The US apparel brand J.Crew Group Inc. filed a voluntary petition for bankruptcy court protection. Another US apparel retailer JC Penney could file for bankruptcy, according to media reports. What does this mean? 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 have to accept that I wasn't a very good businessperson—and close my operations.
Yet failure does not seem to be an option for many western retailers and department stores. In recent years we have seen the likes of Sears Corp, Debenhams, Peacocks and Forever 21 in administration or undergoing restructuring. Why? Because they were not making money.
They restructure and in that process a lot of their debts with suppliers—yes, that's people like me—are written off. Then they return and the whole process starts again.
Several questions arise from this. 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 they have a thing called a pre-pack administration. Several retailers have been through pre-pack administrations and my own research on this shows that the companies which 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? If Debenhams goes into administration, how many creditors will fall with it? And what about Forever 21 and JC Penney?
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 businesspeople 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 very 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. Failure never happens because even if the business is failing, they simply wipe the slate clean and start again. This is a parallel world which few—if any—of my fellow suppliers would understand.
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 will 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 business down.
This is the playing field we are in 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.
Mostafiz Uddin is the Managing Director of Denim Expert Limited. He is also the Founder and CEO of Bangladesh Denim Expo and Bangladesh Apparel Exchange (BAE). Email: mostafiz@denimexpert.com