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NEW YORK — Is fashion retailing becoming hell on wheels?
This story first appeared in the September 23, 2002 issue of WWD. Subscribe Today.
For years certain retailers have been willing to take merchandise on consignment, or “on wheels,” in industry jargon. But while retailers claim they aren’t selling on consignment any more than in the past — and much heavier in jewelry and furs than in ready-to-wear — the difficult retail climate is forcing them to come up with other little wrinkles to keep their inventories at a minimum. Continued from page one
Industry executives are, of course, generally loathe to discuss the nitty-gritty details of practices like consignment selling or other tactics. Most admit there are chargebacks, margin deals and other charges for late delivery or markdowns, but stress these are normal practice. But now stores are going farther to minimize their financial exposure by, for example, stepping-up their number of designer trunk shows to generate sales and customer traffic without having to buy the merchandise.
Although these practices are clearly more prevalent among specialty stores than department stores, retailers said they not only give them a chance to test new items and unproven designers and round out assortments, but more importantly, lessen their financial risk on high-ticket items. On the flip side, however, consignment selling can be an accounting nightmare, especially for big department stores and mass merchandisers.
“The issue of consignment is all about the issue of working capital,” said Isaac Lagnado, president of tactical.org. “It’s all about the conservation of working capital. Whether you call it consignment, allowances, or just-in-time ordering, it all really amounts to the same thing — retailers reducing the risks involved with owning the merchandise.
“The bargaining power of the manufacturer has gone, especially if they are not a destination brand,” Lagnado said. “True consignment, where there is not a purchase order, like in the food industry or newspaper stands, relatively speaking, is somewhat rare. With big department stores or mass merchandisers it could screw up the accounting.”
There is no one set of rules that applies with consignments, which generally refers to the practice of retailers taking merchandise first and paying vendors only if it sells. Often the retailer will hang on to the merchandise for a season — or sometimes even less — and if it doesn’t sell, it’s returned to the vendor. American designers have complained for years about the practice, and about chargebacks, which in the past were limited mainly to U.S. stores and American designers. Now, however, European and Far Eastern designers are being pressured for chargebacks or, in some cases, to sell on consignment, both by U.S. department stores and also by stores in Europe, executives said. Some vendors believe consignment selling is tricky, though, given the accounting implications.
“It’s a very dangerous practice,” said Yves Carcelle, head of fashion and leather goods at luxury giant LVMH Moët Hennessy Louis Vuitton. Carcelle said he’s heard of cases where special concessions are negotiated when a delivery is late, in lieu of having a store refuse the merchandise outright. However, overall he said, “it’s not very common.”
Laurence Danon, president of the Printemps department store in Paris, said, “We hardly ever do consignments, except on very exceptional or spectacular items. But chargebacks is something we’re exploring more and more as a way to limit the risks we take in this difficult retail environment.”
Danon explained that Printemps has agreements with certain vendors to buy more merchandise than it would normally with an understanding that the vendor buy back a certain percentage of the unsold merchandise at the end of the season. More often, she said that Printemps operates leased departments in its stores with brands from Chanel to Boucheron. In effect, the brand pays Printemps rent of between 25 to 30 percent of its total sales in the store.
Sarah Lerfel, who runs Colette, the trendy fashion and design store in Paris, said the store practices consignment only for “very special pieces that we usually use for a window display. Otherwise, we never do it. The store is already very selective in its merchandise; we only buy what we believe we can sell.”
Adrian Joffe, managing director of Comme des Garçons in Paris, said requests for consignment selling are the norm in Japan and are becoming increasingly common in Europe. “But it’s not something we ever agree to,” he said. “It’s very unfair, especially for the young designers who sometimes have no choice but to agree to it.”
U.S. retailers, of course, disagree, saying that consignment selling, in particular, gives them the chance to try out new lines without risking the store on them. Shauna Stein, owner and buyer of On Beverly Boulevard, a sizeable boutique in West Hollywood, said the practice ends up being a win-win situation for the customer, manufacturer and retailer.
“Clients get better selection, the wholesaler gets a chance to show their overcuts or overstock and I get a chance to sell an extra thing,” said Stein.
At Barneys New York, on the ready-to-wear side, consignment sometimes comes into play, but it’s not about the retailer seeking to reduce inventory risk or muscle a vendor. It’s more about giving a designer a break when there might be a problem, such as not shipping on time, according to Julie Gilhart, vice president and fashion director for women’s.
“If we’re getting goods in a month late, then consignment is a good tool to use. We do it on occasion, but rarely do we do consignments on vendors up front,” Gilhart said. “If you don’t like the merchandise, we would never work on a consignment basis just to have something in the stores. Maybe a designer comes to us and says, ‘I think you can sell this, take this style.’ That kind of partnership conversation works. We like to think of consignment in a positive way, something that happens every once in awhile, but not involving a whole collection. Is it a trend for us? No. We are very focused to a Barneys point of view.”
However, she added that designers, being very concerned about image, may offer to some big stores with space to fill a few pieces on consignment to round out the look, and “make the space sparkle.”
Asked if new collections are taken on consignment, Gilhart replied: “When we are testing new designers, we buy them up front, and we’re hoping this is going to work for seasons on out. We buy enough that represents a point of view. You like it and you try it. We don’t have one new designer that is on consignment.”
Kal Ruttenstein, senior vice president of fashion direction at Bloomingdale’s, said, “We did do it [consignments] through the years,” such as with high-end jewelry. “But we haven’t done it in many years. Vendors cut to order. They don’t have a lot of stuff lying around.”
Federated Department Stores takes goods on consignment “very, very rarely,” according to one department store source. “It’s almost never done, maybe once in a while with something like diamonds. It’s discouraged. It adds clutter to your store.”
When questioned if, on occasion, a department store would take merchandise really only because it had a designated space for a brand that needed to be filled with goods, the source said, “Then it becomes a margin deal, which is kind of like consignment.”
According to Ron Frasch, chairman and chief executive officer of Bergdorf Goodman, “The majority of our consignment is with high-end fine jewelry vendors. That’s pretty standard in our industry. Here, the value of the inventory is so significant, we would show a bloated inventory level,” if the goods were all bought. “The advantage to the vendor is that they can swap out the goods and put them in a competitor’s store,” or take them back for a private client, Frasch said.
Consignments are “rare in ready-to-wear” and less than 1 percent of Bergdorf’s total inventories. “Most of the time it happens in a situation where a vendor has shipped late and we don’t want the goods since it’s passed the cancellation date, but they suggest we take it with no liability. That’s not very common,” Frasch said.
For Ron Herman, owner of Ron Herman at the Fred Segal center in West Hollywood, the reason why not to sell on consignment comes down to integrity. Herman said his boutique has sold product on consignment in the past, but it’s not a practice his buyers have kept up. It sends a mixed message to consumers, he said.
“The goal [of consignment] is not as much product driven as much as it is financial driven,” he said. “Imagine if my only concern was financial. I would lose some integrity of my selection and the personality of the store. The art of specialty store retailing would be lost.”
Herman continued: “The customer trusts us to do this. If I opened the door to consignment, I would be a big department store with in-store shops. I would be Bloomingdale’s.”
Yet other specialty retailers applaud the practice and say it is vital in these uncertain times. Crawford Brock, owner of Stanley Korshak, the women’s and men’s designer store in Dallas, said, “Consignments are a viable option in retailing considering the state of the economy.”
Although they’re not a big part of the business, they do serve a purpose. “Consignments have many positives, including being a great tool to test new resources such as young designers. If the consignments do well, then we place an order and bring in more merchandise. Or maybe we don’t have the budget to purchase more merchandise in a certain category but we can bring in consignments to fill the gap. Overall consignments account for maybe five percent of our merchandise,” he added.
Korshak accounts for consignment merchandise on its books by receiving it and showing it as inventory. When it’s time to send it out, they do an RTV, or return to vendor.
“We just treat it as though it’s live and in our inventory. It’s part of our books,” said Brock.
And for some shops in Los Angeles, selling items on consignment is becoming standard issue. On Beverly Boulevard’s Stein estimates 10 percent of her current business is done on consignment. It’s a strategy she started only a few years ago. Usually she’ll take an item or two in dry spells while she’s waiting for goods to arrive from Europe or goods that have run into problems at the factory. Consigned items she’ll accept could be jackets, cargo pants or jewelry. On the flip side, it may be an item she doesn’t believe in.
Either way, the pieces usually sell, she said. “Today, you can’t possibly know everything,” said Stein. “I’m relearning what people want. Some of our old patterns are not working so consignment helps me get through some of those periods.”
As for vendors, it depends on who is asked — and in which product category. Most smaller vendors feel consignment selling is difficult and best kept among friends. Among the major sportswear and dress firms, consignment selling isn’t even in their vocabulary.
Roger Farah, president and chief operating officer of Polo Ralph Lauren, told a Goldman Sachs conference this month that Polo’s new no-return policy will “clean up the brand dramatically.”
He explained that in the past, “We’ve oversold to department stores and they’ve overbought with a safety net created by the excess product, and then we have to find out where to unload the [excess] product.” By eliminating the safety net, Farah said, both retailers and Polo have lowered inventory levels, resulting in a cleaner brand distribution strategy. The repositioning will fine-tune the distribution so that product won’t be “overly available in the wrong channel,” he said.
John Orchulli, chief executive officer of Michael Kors LLC, said the company hasn’t worked much on consignment. “On occasion an item that we insist be part of a stores’ buy may be given on consignment, however, it’s very insignificant in terms of volume.”
Allen B. Schwartz, design director and founder of ABS, said, “I haven’t heard the word ‘consignment’ in 15 years. Those days are over. If someone did that today, they wouldn’t be around in a year. Not that it isn’t hard enough to live with the arrangements you’re asked to make in advertising, poor sales and chargebacks.”
Schwartz said he refuses to take returns. “We cooperate with advertising. We have our share of bad-selling issues, and we work with them throughout the season.”
Elie Tahari, owner and designer of Tahari, Ltd. won’t sell on a consignment basis, but called chargebacks “ridiculous and atrocious.”
“The last five to 10 years the stores developed a profit center,” he said. He said they’ll charge for merchandise that’s stolen from their stores, discounts the employees and their friends get, special events in the stores, and special employee-shopping days. “Basically there goes the profit margin. They can play with the numbers any way they want. You can never check on it. You have to have a whole staff to check them out.”
Stephen Ruzow, president of Kellwood Co.’s women’s wear division, said he never works on consignment. “Number one, you will never see [consignments] in a public company because it’s not a sale. And especially with the environment out there today, we are all certifying our public statements, and you can’t report a sale that’s not a sale so for accounting concerns. Consignments are not a sale.
“From a legal accounting point of view, it’s not a sale and you’re going to take it back if it doesn’t sell,” he said. “It’s a recipe for disaster. First of all, the high-end designers testing something out would most likely do it in their own stores [not in other stores].”
Peter Boneparth, chief executive officer at Jones Apparel Group, said consignment is not a trend that he sees happening in better and moderate.
“Frankly, we are not in the business of selling goods on consignment. I would rather not produce them than sell goods on consignment,” Boneparth said. “I don’t see [consignments] ever happening in this sector, but I think on the upper end, in the designer area, that clearly, has been around for a while.
“Today’s retailers are not relying on people like Jones to sell goods on consignment. They are relying on us to sell goods that turn fast on the floor.”
Brianna Espitalier is the director of sales at Mao Sales Inc., a New York-based showroom that represents up-and-coming rtw designers Michael and Hushi, Zaldi, Liz Collins, Gary Graham, Chanpaul, Tawfik Mounayer and 8 by Tracey Kinney. Espitalier said currently none is selling to stores on a consignment.
“They’re all young and up-and-coming, they need to get paid,” said Espitalier. “But there are so many young designers that really need to be in certain stores that they just sort of do consignment.”
In general, though, most executives agreed consignment selling is a way of life when it comes to high-end jewelry and furs. Ritz Furs, a retail furrier here, generally has anywhere from 15 percent to 25 percent of its merchandise on consignment, but all of it is intact and current, said Keith Tauber, general manager. The retailer focuses on preseason furs, which helps retailers get a handle on what will be the better selling items in the upcoming season.
Once consignment goods are sold, Tauber said he pays his vendors “immediately,” instead of waiting for the standard 30- to 90-day grace period. That is a bonus with furriers and helps Tauber get new merchandise without severe mark-ups, he said.
“The merchandise sells. Getting it is the tough part. Sometimes I have to be quite persuasive,” Tauber said. “I’m constantly looking.”
He declined to name the brands that provide Ritz Furs with consignment goods, since some of them sell to the “better Fifth Avenue shops.”
Dittrich Furs typically calls in 100 units on consignment for its semi-annual sales, and occasionally some more for special promotions at its fur salons in Detroit and Bloomfield Hills, Mich., said Jason Dittrich, owner. Hennessey and Tendler Furs are among the furriers from which they order consignment goods.
Dittrich noted that most furriers increase prices for consignment pieces compared to items that are bought straight out. But from time to time, vendors urge him to take specific pieces on consignment that he would not order otherwise, he said. It is usually not more than 10 pieces annually.
Many jewelry designers and executives said consignment used to be limited to very expensive jewelry pieces at high-end department stores, but now the practice has permeated much of the industry, and even smaller and independent retailers are taking more jewelry on consignment. While there is no starting price point where consignment begins, vendors note that even items retailing for as low as $2,000 are now taken on a consignment basis.
Most jewelry vendors interviewed spoke about the consignment issue only on the condition of anonymity. A number lamented the fact that they are now forced to bear more and more of the brunt of doing business with retailers. And a few suppliers said they refuse to do any business on consignment and thus will not work with retailers who insist on those circumstances.
According to jewelry vendors, often they aren’t able to record sales from purchases made on consignment until months after an item is sold. After merchandise is sold, there is frequently a period of time, usually 30 days, where customers can exchange it so vendors can’t even process an invoice until after that time. And retailers don’t usually pay immediately upon receiving an invoice. Therefore, the period of time between when something is sold on consignment and the vendor is paid can stretch to three to four months.
A spokesman for Chopard in Paris said consignment is not a regular practice, but acceptable for special and exceptional pieces. Boucheron said consignment arrangements are considered on a case-by-case basis.
Another fine jeweler, who sells to Neiman Marcus, Bergdorf Goodman and other high-end stores, said: “Budgets are smaller and smaller, and the amount of risk retailers want to take is smaller and smaller. It’s getting harder for them to make a financial commitment. When the years were good, stores didn’t mind taking risks, but now turns have to be so high that they can only achieve it by bringing things in on consignment. It’s especially hard for young designers.”
In addition, this jeweler noted, vendors now have to be able to market their product and finance their line in other ways. “Now, you have to provide trunk show money and pages in their catalogs and participate in the postcard campaign if you want to be in the playing field,” he said. Stores want designers to have trunk shows, but they do not buy the trunk show merchandise, he noted.
Wolfgang Mockel, owner of KWM Exclusives, which distributes fine jewelry line Tamara Comolli and other collections, said, “It’s really tough for a small vendor. I definitely think consignment is a growing issue because of the economic times. Some retailers don’t buy anything now.”
One New York distributor of a high-end Italian designer jewelry line said, “The practice has gotten worse. It’s now industrywide. It used to be that consignment was done on very high-ticket big stone jewelry, but now retailers have caused it to start happening with trendy designer jewelry.
“There has been a trend in recent years for retailers to feel that they don’t have final responsibility for their purchase,” she said.
She also said consignment reduces what is available to consumers.
“Retailers who insist on consignment are hurting the selection for their customers,” she noted. “It ends up hurting the industry as a whole because there will be less design and ultimately, consumers will be less motivated to buy more jewelry.”