200520 Navigating Volatile Times In Retail 1920 1280
200520 Navigating Volatile Times In Retail 1920 1280

Navigating volatile times in retail

Many retail companies have come under unprecedented pressure with changes to standard ordering processes and sales methods. Surviving the storm means adapting business models now and making steps to lock in new ways of working in the future.

Times of limited liquidity

For retailers attempting to navigate through the challenging business conditions they are currently facing, a shortage of liquidity undoubtedly remains the number one problem. As traditional sales channels rapidly decline and consumer spending decreases, the sudden loss of income has caused many retailers to switch to survival mode in order to make sure they are still operating by the time things begin to improve. For most industries and regions, there is still no clear picture of just how long the downturn might carry on.

Louise Sjöberg, Relationship Manager at Nordea, says: “Many of the retail companies I speak to are struggling with a lack of cash and the uncertainty of not knowing how long this crisis will last. They are also challenged by the long lead times that are traditionally in place with the manufacturers of their products.”

“Usually retailers would make an order with their suppliers which needs to be paid many months before they eventually sell their products on to wholesalers to be sold in stores, thereby finally receiving income. These upfront cash requirements are a particular challenge in times of limited liquidity. With many stores closed or running limited operations, the retailers are also uncertain what kind of sized orders they will receive from the wholesalers and whether payment will be delayed even further.”

Usually retailers would make an order with their suppliers which needs to be paid many months before they eventually sell their products on to wholesalers to be sold in stores, thereby finally receiving income. These upfront cash requirements are a particular challenge in times of limited liquidity.

Louise Sjöberg, Relationship Manager at Nordea

The disruption to the traditional ways of producing and selling goods has had a severe impact on businesses in the short term and may even lead to new retail models of operating in the future that are here to stay. For banks, trying to assess which companies will survive the crisis and beyond can be difficult.

Louise adds: “Most people of course believe that their company will survive and that they just need to find a way of making it through the crisis. The challenge is creating a clear picture of whether their business model is successful in normal times and running through the scenarios to get an idea of what sort of new conditions they can withstand if things take a longer time to get back to normal.”

Urban Ljungblom, Trade & Working Capital Development at Nordea, says: “At the moment it’s an unsafe environment for many businesses and we don’t know when things are going to become normal again. It’s a particular challenge for retailers making orders now that will eventually give them profit and the revenue in half a year. Making an assessment is even harder today when things are disrupted and very different from normal circumstances.”

Changing business models

As well as checking how strong a company’s balance sheet is and how profitable they were before the crisis, analysis is also made of the sales channels used.

Louise says: “Nowadays we are spending a lot of time looking at how retailers actually sell their products. Many companies are selling a lot of items through their own online channels or have increased the focus on their e-commerce business. This is very important as we have noticed that retailers who are able to sell online through their own channels have seen a growth in this area. Obviously, more sales are taking place online overall as shoppers have been less able to visit physical stores. The ability of being able to compensate for reduced sales to  wholesalers by selling more directly to consumers through your own online channels is clearly something we look at.”

Many companies are selling a lot of items through their own online channels or have increased the focus on their e-commerce business. This is very important as we have noticed that retailers who are able to sell online through their own channels have seen a growth in this area.

Louise Sjöberg, Relationship Manager at Nordea

Urban adds: “If retailers actually have final consumers that they can reach directly that is of course a big advantage. There are hardly any retailers left that sell exclusively through physical stores and diversifying the sales channels to include online is an important way of helping in the fight to survive. However, companies selling directly to final consumers online often have very high growth ambitions. This can create challenges for liquidity during normal circumstances which might be complicated even further as suppliers are looking to keep payment terms as short as possible during times of crisis. In these cases working capital  can become a bottleneck and financing can become difficult.”

Being extra careful with working capital places extra focus on ordering volumes and continued efforts to reduce costs wherever possible.

Louise continues: “Many companies have been very quick to reduce their costs and have made some very good efficiency gains in a short amount of time. Any relevant government packages such as the temporary support for furloughed employees or available tax breaks have been very helpful. In Sweden, the government financing body Almi has also been providing extra investment support and advice for companies. Almi has been given increased funding to provide more loans to businesses through the crisis. As well as Almi, the Innovfin initiative organised by the European Investment Fund also offers guarantees for fast-growing and innovative small and medium-sized companies via banks or financial institutions.”

An eye on the future

Whilst the primary focus for businesses is currently to ensure survival in the following months by reducing costs, switching to online if possible and pursuing other measures, it is important to plan for when the crisis is over.

Louise says: “Retailers will still need to make orders to ensure they have products to sell in the coming months. For many this is a fine balance between deciding how much they can order now and how much money they need to save to get through the downturn.”

Retailers will still need to make orders to ensure they have products to sell in the coming months. For many this is a fine balance between deciding how much they can order now and how much money they need to save to get through the downturn.

Louise Sjöberg, Relationship Manager at Nordea

Urban notes: “Closely involving the bank with any planning and operational decisions that a company takes before taking action is a good way of  cross fertilising or exchanging thoughts and ideas. If a bank advisor is involved early on it is easier to make the case that the company has been really structured and systematic in their plans. It’s a lot easier for a bank advisor to say ‘I was contacted about this beforehand, I shared my views and they have applied this thinking. This is the input I gave them and they are ready to go’. Having this dialogue beforehand is important as its very hard to change the course later.”

Louise adds: “Some companies that have been in contact early on in the crisis have been helped to develop plans for the temporary loss of business and the funding they will need to get through it. Being involved at an early stage has created the chance to build a robust case and involve other sources of support such as Export Credit Agencies (ECA).”

There are many companies importing and exporting across Europe that would see the benefits of using platforms such as we trade. One obvious advantage is that payments to or from suppliers can be guaranteed by the supporting we.trade banks.

Louise Sjöberg, Relationship Manager at Nordea

New ways of trading

Innovative trading platforms such as the co-banking solution known as we.trade also offer alternatives to traditional ways of conducting trade both during the crisis and in the future.

Louise concludes: “There are many companies importing and exporting across Europe that would see the benefits of using platforms such as we trade. One obvious advantage is that payments to or from suppliers can be guaranteed by the supporting we.trade banks. The alternative to this without we.trade is to increase a company’s overdraft facility. As all of the companies trading on we.trade are pre-approved by their banks, we.trade creates a trusted and automated platform for trade that expands the use of bank guarantees and therefore alternative sources of funding. In most cases guarantees are preferable to increasing overdrafts.”

Urban concludes: “From a credit risk perspective, if a bank grants a company an increased overdraft facility this can be used for any non-specific purpose. If a Bank Payment Undertaking (BPU) is granted, you know that the guarantee is made that relates to specific deliveries from a company’s supplier. A guarantee in this case is a  short term undertaking and that is self-liquidating which means it is more likely it will cease to exist by itself. From a credit point of view this is a benefit for companies that are experiencing very tight credit limits and an alternative way of being able to support their ordering process.”

Contact your Nordea Trade Finance advisor for further assistance or find out more about we.trade here.

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