Agenda-setting intelligence, analysis and advice for the global fashion community.
NEW YORK, United States — On Saturday night, Rony Vardi made the agonising decision to temporarily close both of her stores. Catbird, her Brooklyn-based jewellery business, relies on the shops for most of its sales. But the health and safety of her 140 employees and customers came first, Vardi said.
“The stores are a huge part of [the business], not just financially but emotionally,” she said. “They are the anchor.”
Vardi is leading Catbird into an uncertain future. The business is self-funded, so she doesn’t have investors to help financially. But she has built her company slowly and carefully over the last 16 years, never spending money she didn’t have. That approach helped Catbird survive the 2008 recession, and it’s going to help now.
Vardi is now working with a “skeleton crew” of employees to finish making and send existing e-commerce orders. But she doesn’t know when she’ll be able to reopen stores, or whether it will still be possible to fulfil online orders. Or whether people will be in the mood to shop for jewellery right now at all, and if they are, whether they’ll come to her website. She is paying everyone’s salary and benefits now, and is hoping the e-commerce orders can help her continue to do so.
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As the coronavirus pandemic brings the economy to a grinding halt across North America and Europe, Vardi is one of many small business owners that will be facing months of lost sales and basic questions about their supply chains and ability to fulfil orders. Potential customers are stuck at home, and many have had their pay cut or were laid off. Spending on discretionary items — clothes and beauty products among them — is expected to plunge.
[ What can business owners do to prepare?Opens in new window ]
For starters, brands need to start by cutting non-essential spending, negotiating with retail partners, preparing for reduced cash flow, pivoting to direct sales channels and exploring federal aid options. Employee welfare must be top of mind throughout. It won’t be easy, and not every business is going to come out the other side. But others will adapt and survive.
Read on for BoF’s guide to planning for the pandemic.
Prioritise Employee Health and Communicate Early and Often
The first priority should be your team's health and well-being. Communicate clearly and empathetically, as everyone adjusts to a new reality of self-quarantine, working from home and a lack of childcare. Many businesses create internal task force teams to lead the pandemic response and make sure feedback is received and directives and updates are shared quickly and effectively.
Manage expectations by being as transparent as possible about where you do and do not have the ability to employ people at full pay. Every employee of a small business will have questions about their future and communicating early and often, and being realistic without unnecessarily scaring people, will help keep things stable as long as possible.
It is likely you’ve already closed your stores, but if not, work to do so soon to reduce the exposure of your employees to customers and each other. If you have the budget, consider retraining store employees to do clienteling with online customers, reaching out to established shoppers directly.
Communicate with your distribution partner, if you have one, to understand what precautions they are taking and whether they are still able to fulfil orders. Talk directly and openly with customers about the store closures, limited operational capacity and delays they should expect.
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“People are looking after their employees, but also make sure they message that to consumers,” said Sarah Willersdorf, partner and managing director at Boston Consulting Group. “There is a social impact element.” Your community of shoppers care about how you are running your business during this crisis.
Financial Forecasting 101: Planning for the Bad, the Good and the Worst
Richer Poorer, a socks-and-loungewear brand based in California, has seen more than a dozen of its wholesale orders either cancelled, reduced or delayed as retailers reel from the fallout of the virus. Although the 10-year-old company sells online as well, wholesale accounts for the bulk of its revenue.
Although the brand knows its sales will take a hit, the challenge now is trying to understand the extent of loss, and for how long.
“We’re remodelling [our forecast] this year and we have no idea when the impact is over,” said Iva Pawling, Richer Poorer’s co-founder.
Brands should plan on seeing reduced sales through at least September, according to Frederic Court, founder of venture capital firm Felix Capital.
To begin planning for lost sales, financial experts recommend looking at how the pandemic unfolded in China as a starting point: In a 12-week period starting in January, in-store sales were reduced by 50 percent to 80 percent according to Willersdorf. Retail stores began to reopen in early March, but it’s been a slow recovery. Retailers have had to offer discounts to bring back shoppers, Reuters reported.
Through financial modelling, companies can calculate a base case, an upside case and a downside case. Then, assess how much money would flow in under each scenario, balanced against the amount spent to maintain operations over a three to six month period.
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For Ambika Singh, founder and chief executive of rental service Armoire, the baseline scenario is based on revenue trends from last week, when a significant number of users cancelled their subscriptions. The upside, Singh said, would be calculated on if revenue is 25 percent better than last week and the downside reflects a further decline of 50 percent.
What we're projecting on Friday is different from what we're projecting today.
“We’re trying to project these trends, but what’s hard is that what we’re projecting on Friday is different from what we’re projecting today,” she said.
The downside scenario is particularly important, said Matthew Tingler, an investment banker at Baird.
“As a business owner you have to prepare for the worst-case scenario because ultimately you need to finance your business and be as conservative as possible,” he said.
Companies should also factor in potential disruptions or improvements that could come up over the coming weeks and months.
“There’s an immediate crisis stage, which we’re in now,” Willersdorf said. “There’s a second phase of lockdown, where stores will be required to close and this period could last anywhere from three to six weeks, followed by a phase of cautious openings … then afterward, the new normal.”
Prioritise Cash Flow Over Revenue
After gaming out multiple scenarios, companies can plan their response under each set of circumstances.
If revenue isn’t flowing in, retailers have no more access to cash. This means they must put immediate, tight controls on money that’s flowing out. Brands must assess cash reserves and determine which expenses are essential and what can be cut.
“You’ve got to make sure you’ll be in business a month from now, two months from now so driving revenue isn’t even important,” Tingler said. “It’s cash management.”
Tingler said marketing, rent and personnel are three areas that most businesses will likely need to cut back because they’re typically the biggest expenses.
For companies that may not have much cash on hand, now is the time to be “decisive and creative,” starting with temporary measures like speaking to landlords for rent abatements, Court said. “Cutting discretionary spending is critical.” (Some cities have suspended eviction proceedings, including New York and Los Angeles.)
Gary Wassner, founder of Hilldun, a factoring firm that provides designers with loans and other credit, advises small businesses to pay only essential bills, like payroll and for the production of your goods.
Everyone is going to have legacy debt from these three to six months.
Other bills will have to wait.
“You’re going to have to appeal to all of the people you work with and… say, ‘I can’t pay you now, I can pay you when cash flow improves. If you allow me to do this, I will stay in business and I will pay you,’” he said. “But you can’t get blood from a stone. No one has cash flow in these companies now.”
And all businesses are facing similar challenges. “Everyone is going to have legacy debt from these three to six months,” said Wassner.
Loans
State and federal aid packages are being proposed and passed now to support the many small businesses struggling during the quarantine, though relief may not come fast enough.
President Donald Trump has offered $50 billion in loans through the Small Business Administration (SBA), where businesses can apply for a maximum of $2 million with an interest rate of 3.75 percent. According to reporting from CNBC, the SBA does not have the infrastructure to allocate such a large pool of money, which is likely not enough to cover the amount needed in the country anyway. But more budget is being allocated to the SBA, which is taking applications on its website. The president also signed an economic relief bill that expands unemployment aid, among other measures.
In New York, Mayor Bill de Blasio is offering zero-interest loans to businesses with fewer than 100 employees that have seen sales decrease by more than 25 percent. Businesses with fewer than five employees are eligible for grants that could cover 40 percent of payroll for two months. San Francisco also has a relief fund, offering up to $10,000 to small businesses with less than five employees.
Larger government funding aid proposals are in development, however, so business owners need to keep up with these programs as they are signed and rolled out to the public.
Triage Expenses
Shan Reddy, a financial consultant for small and medium-sized fashion brands, advises brands to ruthlessly evaluate every line item in their business, determine if it really needs to be there and think creatively about how to avoid wasting money or selling to retailers who are less likely to survive this crisis.
Administrative and logistical work can be outsourced to a third party. Underperforming wholesale partners can be cut off. Inventory should be reallocated to e-commerce. Direct-to-consumer brands that have prioritised growing sales over achieving profitability will need to reorient their thinking, especially if new venture-capital funding grows scarce.
What does cutting down expenses look like? First, start with the easy stuff: cancel all planned events and travel, new initiatives that require research and development spending, as well as any other non-essential capital expenditure, such as store refurbishments or new hires. Marketing can also be reduced if cash is tight, starting with expensive avenues like TV or print.
Many companies will need to cut staff. Labour is typically the biggest expense for small retailers. There are steps businesses can take to postpone layoffs, however. Armoire’s Singh cut her pay to $1, and plans on asking her team for voluntary salary cuts in exchange for equity in the company.
You should enable people to remain employed but share the suffering of the impact.
“You can ask people if they want to take unpaid leave, or reduce senior executive salary by 15 percent,” Court said. “You should enable people to remain employed but share the suffering of the impact — that way you can retain talent.”
For some disciplined businesses, all expenses can be made negotiable. Singh said that she’s working on every single fixed cost to be a variable one, meaning that even necessary recurring costs like rent could be reduced.
Negotiate with Retail Partners
Richer Poorer’s Pawling already placed product orders with her factories ahead of the fall season. But as retailers will inevitably face months of lagging sales through the summer, it’s likely that they won’t be able to pay her bill for the shipment that she already confirmed with her own manufacturers. Under this assumption, Pawling should go back to her manufacturers and reduce her order to avoid being stuck with excess inventory that the retailers will potentially send back at the end of the fall season, said Court.
“You can assume boutique wholesalers will have a dreadful spring and summer,” Court said. “In September, [this means that] they’ll either cancel orders or take a long time to pay.”
Wassner advised brands to push back on wholesale partners that try to cancel orders.
“If stores want to cancel orders, you have to say, ‘I can’t, I just can’t. You cannot cancel them, I’ve already made them, I’ve spent the money. Let’s work it out, let’s stagger deliveries, let’s push them ahead for when you actually are open,’” he said.
Reddy advises small business owners to take a close look at all of their contracts with vendors, stores and other outside partners to understand what flexibility they might have in regard to sell-through agreements or payment deadlines. He advises speaking to peers who also work with the same retailer to see what they have offered brands in the past.
“Terms are always negotiable, especially in a crisis,” Reddy said.
Terms are always negotiable, especially in a crisis.
With retailers trying to cut back on orders, a personal appeal and phone call can lead to solutions, as many shops are family-owned. “A minor discount or a delay can go a long way,” said Reddy.
He also recommends brands start reaching out to off-price retailers like T.J. Maxx and Nordstrom Rack to "have a hedge against your inventory in case someone can pick it up."
Brands need to talk about the autumn and resort seasons with retailers now.
“It’s probably better to ask than to manufacture the product and incur a loss,” Court said. “It won’t be easy but you have to be cautious.”
Maximise Direct-to-Consumer
There is one bright spot for retailers that sell online. Depending on the product category, e-commerce sales may increase as consumers are stuck home and online shopping becomes recreational. Data from retail customer service software Hero, for instance, shows that in the first two weeks of March, online purchases made between 9am and 6pm increased 52 percent compared to the same period last year.
This means that brands with an online channel can use this opportunity to salvage some sales.
“You want to focus on anything that drives traffic online, whether that’s Facebook or Instagram,” said Willersdrof, who also recommends increased investment in Google and affiliate marketing with publishers.
For Pawling, e-commerce has been her silver lining, perhaps because her products are centred around comfort: soft sweatshirts, tops and bralettes.
“Everyone wants socks and tees and matching sweats,” she said. “[People] still want something new to refresh their comfort wardrobe.” Online orders are up 250 percent in the past 10 days. These sales still don’t make up for Pawling’s lost wholesale orders, however.
“Allocate your best inventory to [DTC],” said Wassner, recommending brands focus on hero products and surefire sellers online. “There is always core product that you know is going to sell.”
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