March 2016

From Brick-and-Mortar to E-Commerce: Commercial Finance’s Evolving Role in Retail

Retail sales are moving from brick-and-mortar to the Internet. Opportunities still abound for commercial finance consultants, but Donald Barrick points out there are obstacles to be avoided in this new environment.



Donald Barrick, President, RMP Capital

Donald Barrick, President, RMP Capital


As legacy retail stores face an uncertain future, will the commercial finance sector enter panic mode? Within the past few months, two of America’s largest retailers, Walmart and Macy’s, have announced major reductions and consolidations.

On opposite ends of the consumer spectrum, Walmart plans to close 269 stores and lay off as many as 16,000 employees, while R. H. Macy’s, one of the
country’s oldest department stores, plans to close 36 stores and lay off 4,500 employees.

From my perspective in commercial finance, these new year declarations call for all of us to update how we meet the needs of our clients — manufacturers, wholesalers, distributors, jobbers, contractors and service providers — that sell to retailers.

Walmart’s intended closings account for less than 1% of global square footage and revenue, which totaled $485 billion last year. Despite Macy’s negative alarm, we should not forget that its performance has enjoyed considerable restoration. Last year, CEO Terry Lundgren led Macy’s to its highest annual earnings to date, $28 million. As recently as 2008, Macy’s dipped to historic lows, sales tanked and the chain was flirting with default and bankruptcy.

It is true that Macy’s sales in November and December 2015 were down by 4.7% when compared with the prior year. The cause appears to be the extraordinarily high temperatures and mild weather many regions of our nation experienced. Merchandise and products associated with the fall and winter weather — like heavy coats, sweaters, boots or space heaters — didn’t move. Presumably, this was a temporary glitch that will be resolved if weather conditions normalize.

Economic indicators demonstrate how other products and sectors saw robust sales during the same period. For example, automobiles and vehicles enjoyed one of their best years during this decade. Real estate and home buying saw an encouraging comeback in terms of both more transactions taking place and rising values.

Shifting Consumer Habits

What Walmart, Macy’s and other retailers must now address is a real estate and logistics watershed. The mode of retail sales paired with new consumer buying habits is undergoing a major shift. The real estate costs and the obligations associated with them (electricity, cleaning, maintenance, staffing, deliveries, showroom displays and inventory storage) have been yielding diminishing returns. Meanwhile, both retailers — like
many others — have enjoyed growing, flourishing e-commerce sales.

At Walmart, e-commerce expansion has been consistent. In 2014 they were fourth in the “top 500” according to Internet Retailer. During 2015, online sales grew by another 22%. Mobile sales are fueling this growth — nearly 70% of U.S. Walmart.com traffic came via mobile devices during the recent holiday period.

Macy’s online sales have increased 40% each year since 2010, accounting for nearly $3.1 billion or approximately 11% of its total yearly revenue.

Lackluster sales performance through traditional “brick and mortar” locations is becoming neutralized through the expanding web transactions. Both Walmart and Macy’s must now concentrate on striking a harmonious blend of having a physical presence through their locations while encouraging e-commerce through quality customer service and shipping, operating efficiency and more. Retailers must confront the economic equation that this transition represents.

While manufacturers, distributors and wholesalers will continue to need commercial finance companies, several trends should be noted.

Cash Flow Challenges

There is now increased incidence of slower payments, which becomes a double-edged sword. “High-yield, quick pay” is our perfect world. Still, we must always be prepared to manage money that gets stretched out. Look at the consequences if payments are delayed from 45 to 60 days — an increase in the credit period of 25%.

Many soldiers in commercial finance are making cash payments on funds on a monthly basis. This latest development parks more accrued interest on our books, which is not credited as income until our client or the procurement source pays us. It becomes a cash flow challenge for members of our sector.

It is paramount for us to counsel our clients about defining true sales. All of us have experienced the client who becomes excited by the glitz of their “big-time” transaction with a Walmart or Macy’s. It has always been an issue. Now it is more complicated. Our small business entrepreneurial client is often put at a severe disadvantage when selling to “the 800 pound gorilla” of retailing. I understand and respect that part of the
giant retailer’s business strategy is to take maximum advantage by dictating the terms and conditions of that transaction in exchange for the opportunity they have provided. This scenario especially rings true when our small entrepreneur client has limited options because of its financial pressures. In effect, they get boxed in by the retail goliath.

More than ever, we in commercial finance, together with our clients, must rigorously review sales contracts. Many are nothing more than consignment agreements!

The commercial financier is better off discouraging their client’s exuberance than allowing them to get trapped in a lopsided agreement where the retailer has total command and the client finds itself in serious risk.

Lenders Must Enforce Terms

The factor, ABL or purchase order financier must be cautious to avoid getting caught in this spider web: Terms and penalties must be enforced against a retailer in accordance with a contract. Does the manufacturer, wholesaler or distributor have the courage to follow through here? Potentially, the commercial financier is unfairly perceived as “the enemy” by both their client and the procurement debtor. Your client doesn’t want
to believe that “if you do not collect today, there will be no future business.”

In my crystal ball, I see several makeovers in retailing where members of the commercial finance sector will be forced to adapt. Today, more retailers are demanding that the manufacturer, wholesaler or distributors “sit” with the inventory, especially big-ticket items. The retailers do not want to take possession. Again, this is a tactic for the retailer to avoid risk and restrict its need for payment. For example, the retailer may have one piece of merchandise on hand at a showroom location. If the customer buys it, the retailer places the order with the manufacturer and they both earn a very good mark up because of customer contact. Shipping is conducted from the manufacturer’s warehouse inventory. What role does the commercial financier play in this arrangement?

As an aside, we should look at the updating alterations now underway by shipping businesses as their way of addressing new retailing demands. According to the Wall Street Journal, half of all online orders arrived within three days last year — up from about one third in 2013. Shippers and retailers are prioritizing and fine-tuning ship-from-store logistics and creative delivery, with a major push for same-day delivery.

As an extension of this, the value of retail real estate locations will continue to decline by the next decade. This will revolutionize the culture of shopping as a pastime. There will be increased opportunity for virtual stores and consumption through the Internet. A retailer will be able to demonstrate a product online through videos, photos and interactive communication programs like Skype. There will be relatively little need for the consumer to make an on-site inspection. The Home Shopping Networks have been a pioneering format of what I predict will dominate general retailing. How will the commercial finance sector continue to serve its clients selling to retailers? Now is the time for the commercial finance community to be introspective.