In the trenches of Seventh Avenue, privately held vendors are strategizing a counterattack against the economic arsenal that has besieged them. Their number-one strategy: Becoming better allies with their equally struggling retail partners.

This story first appeared in the March 18, 2009 issue of WWD. Subscribe Today.

After reporting anywhere from small gains to moderate losses in 2008 — with strong first-half sales offset by a dead fall and record markdown requests diluting profits — most wholesalers are projecting flat sales as their best-case scenario in 2009, though many fear worse. Firms have cut costs by from 10 to 20 percent, many owners even putting their own money into secure bank loans, and some are pursuing strategic alternatives — buying, selling to or partnering with another firm.

But with up to 10 percent of their retail accounts going under, up to 10 percent paying late, and some major department stores and tiny boutiques not qualifying for credit by factors, vendors are spending a lot of time thinking about how to accommodate retailers’ needs — their credit woes, their waiting longer to place orders, their decreased trade show attendance, and their increased markdown requests. Here is the vendor game plan:

Preparing for Immediates

As uncertainty increases, retailers are holding out to place their orders, challenging vendors to change the way they manufacture.

Because cutting to order may take too long to fill immediate orders, some manufacturers are starting to project volume. For the first time this spring, contemporary vendor KAS has projected goods, making bulk orders of key trend items such as long maxidresses and tunics in prints, hoping it will recoup business not placed during the fall.

Of course, that can be a dangerous strategy in this economy, where inventory is a dirty word. A safer option is shortening speed-to-market, though for most that’s easier said than done. One company that has been able to manage it is Nicole Miller, which is shifting more production to New York factories that can fill reorders in less than two weeks, said chief executive officer Bud Konheim.

Handling Credit Issues

Vendors are attempting to walk the line between helping their retail partners, who are struggling for credit, and protecting their own businesses.

For un-factored retailers, vendors said they have a few options: don’t ship and lose the business; accept post-dated checks from stores; have retailers pay by credit card up front; pay a 1 to 2 percent insurance surcharge to the factor when that’s an option, or ship at their own risk.

“The credit risk is difficult to manage under normal circumstances — it is dramatically magnified given the steep downturn,” said Michael Culang of Hampshire Group, adding that nearly all of the major retail bankruptcies have affected the knit company.

Victor Rousso, ceo of Rousso Apparel Group, said about 10 percent of his retailers are running 10 to 60 days later in paying their bills. The firm is factored, and with some of its accounts having gone out of business and others having credit problems or on a watch list, Rousso said he is being selective in shipping. “If the factor won’t take the risk, it’s prepay or we won’t ship,” he said.

After launching in 2006, KAS is looking to insure its receivables for the first time, “because so many stores are closing or suffering their own problems,” said Kirat Anand, owner of KAS. The New York-based contemporary line is carried in more than 250 stores, 2 to 3 percent of which have gone out of business. About 80 percent of KAS’ specialty store accounts pay for the orders up front on their credit card, but Anand said some accounts are now asking for terms, such as paying 30 days late or taking items on consignment — which Anand said he won’t do even though he thinks the stance affects his sales.

The nearly $10 million knit firm Ava, which does not use factors to insure its receivables, said that between 5 and 10 percent of its approximately 1,000 specialty store accounts have gone out of business in the last year. Of those accounts, some returned the merchandise in advance, others sent personal checks and still others paid half to at least cover Ava’s costs, according to Ava president Jonathan Ozdemir.

“The problem is that getting credit for some of these big retailers has been tough and some have maxed out their credit limit with factors,” said Jamie Gorman, president of moderate vendor Only Nine. “So if you have a $100,000 order ready to ship, you might not be able to ship it or you ship it at your own risk or the factor charges you an additional percentage off the order to finance it. Thankfully, we have those steady healthy accounts to make up for these scary ones.”

Visiting Retailers

Vendors are visiting specialty stores on their own turf.

“We have never experienced a time like this in our industry’s history, so more than ever we wanted to get out there to work with our retail partners,” said Monica Forman, president of bridge-priced Magaschoni, which has always done well with trunk shows.

To offset declines in traffic at trade shows, dress firm Donna Morgan and Ali Ro’s sales teams are hitting the road to visit their specialty store accounts. “We’re trying to save retailers the costs, and they were so grateful,” said Donna Morgan ceo Kathleen McFeeters. “It also makes our salespeople more aware of what’s happening.”

Visits are also proving to be a good way to drum up business, as retailers redefine themselves in this economy. “Because of what’s happening, our sales staff is knocking on doors of stores that typically carry $800 European designer suits,” said Alex Garfield, founder of better-priced line Peace of Cloth. “And they are picking up our $200 pants because they make sense in this economy.”

Negotiating Markdowns

The bad news: Vendors agreed retailers were asking for more markdown money than ever, after the worst fall and holiday retail season in decades. The good news: Vendors reported both sides were more open to negotiation than ever.

“Most of our retail partners were very cognizant of the fact that we could not possibly bring them to normalized margins in a year such as 2008,” said Culang of Hampshire Group. “This is not to say that they were not aggressive; the fact is we provided more support dollars than ever before with the knowledge that given the circumstances we all face, it is difficult for either party to be totally satisfied. I do believe that the realization that these are unprecedented times created common ground that made the process a joint effort in establishing a reasonable outcome for both sides.”

Rousso Apparel Group — whose lines are carried in more than 2,000 doors, including Macy’s, Dillards, Nordstrom, Belk and Urban Outfitters — said requests doubled from the year before, but that Rousso expected payment to settle at a more modest 25 percent increase. “We are doing our best to make everyone happy, but it’s not easy,” said Rousso, adding negotiations were difficult. “Givebacks in past years have been too high in a good economy — certainly no one can afford to give back more and stay in business.”

Sometimes, though, compromise could not be reached, and vendors walked away to preserve their own bottom line rather than the retail account.

“Accounts came to suppliers to be bailed out — but we have to survive too,” said knit designer Christopher Fischer. “When we helped them, they gave us the assurance they would be loyal partners going forward.”

Exploring Other Channels

As dealing with retailers raises more and more issues, some vendors are exploring alternative channels of distribution — so long as they don’t require major capital investments. Appealing options include e-commerce, television direct-to-consumer appearances and even stores in China.

Konheim sees Nicole Miller’s biggest growth potential in e-commerce, which outperformed his eight brick-and-mortar retail doors last quarter. After similar success with its e-commerce (growing 40 percent in January), Lacoste is also focusing on growth in that channel. “We think e-commerce is the way America is shopping today,” said Lacoste ceo Robert Siegel.

Magaschoni is expanding e-commerce and exploring retail opportunities as real estate opens. The company is making its first move with a pop-up store opening in Southampton next month. “We’ve been thinking of maybe opening our own retail stores in an effort to promote the brand,” said Forman.

Luxury knit vendor Christopher Fischer is looking to open an outlet store in New York this year, perhaps in the Garment Center. “I don’t need a prime site for this,” Fischer said, adding the company has been increasing its use of online discount sites to clear inventory.

Christopher Fischer, which does about a quarter of its business abroad, is expanding further globally, opening a showroom in Shanghai this year and showing at more trade shows in Europe. Fischer predicts international business will soon represent more than half the company’s sales. “Although it’s a global recession, it’s still better to be diversified,” Fischer said. “China’s economy is affected, but it is still having a lot of growth that’s not happening elsewhere.”

China is attracting other vendors as well, even as its unemployment rate increases and economic growth slows as demand for its exports wanes. August Silk, part of a publicly traded Hong Kong-based company, plans to open a retail store in China this year.

China-based WD-NY is exploring additional channels of distribution, including increasing WD-NY president Warren Donner’s TV appearances on home shopping shows and doing more moderately priced private label business. “Who knows how many stores will be left?” said Donner, who had done business with both Goody’s and Gottschalks. “Did you ever think Circuit City would go out of business?”