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Twelve Signs that a Distributor ( Retailer) is in Trouble

By: Greg Seminara, Export Solutions
Topics: Crisis

Early indicators suggest that 2016 will be another challenging year. Global outlook is not gloomy,but growth appears to be dialing back in emerging markets,causing concern,but not panic. Certain markets, retailers, and distributors are still in the doldrums, suffering a severe hangover from the recession.Listed below are twelve signs that a distributor or retailer may be experiencing financial trouble.

1. Country facing Economic Crisis – There were warning signs in Greece, Portugal,Spain, and Ireland that these markets were in turmoil. So why were some surprised when distributors and retailers in these markets faced insolvency ?The Economist Intelligence Unit and other services provide regular updates and outlook for country level economic data. Our consumer oriented businesses tend to track pretty closely with overall economic trends in a country.

2. Reduced Inventory – Normally distributors like to keep 6 weeks of sales inventory on hand and retailers approximately 2 weeks warehouse stock. These can vary widely depending on your supply chain efficiency and turnover. Look for shrinking inventory levels or “emergency” rush orders to prevent an out of stock. Similarly, delayed or reduced orders to support a major promotion or peak seasonality are also warning signs.

3. Distributor loses a Major Brand – Brand owners maintain the right to change partners. For distributors, there is an “ebb & flow” of business lost and business gained. Trouble could be lurking, if the brand lost is a #1 or #2 line or if the brand has partnered with the distributor for many years.

4. Distributor Brand Manager ( or Buyer) has a heavier workload. This could reflect a loss of business, employee turnover, or organizational cut backs.

5. Margin Hikes or Retail Price Increases – In some markets, distributors have the flexibility to take price increases. They risk shipment loss, but their total profits may be up if they can gain more realization per case sold. The same applies to retailers who may be able to pass on discrete price increases.

6. Payment delays –Most manufacturers track Days Outstanding and maintain contractual agreements with distributors and retailers regarding payment terms.

7. Distributor Logistics Outsourced to a Third Party- This may represent a business enhancement in some cases. Coupled with other negative indicators, logistics outsourcing could indicate a problem. Distributors can raise cash by selling/leasing his warehouse and secure incentives for outsourcing his logistics business.

8. Organizational Cutbacks –Employee Turnover – Employee headcount is usually the largest single expense at any distributor. Look for cutbacks on the retail sales team. These are easiest to miss, as the retail sales people and merchandisers do not come to the office. Spend a half day working with a retail territory manager and you will learn “what is going on”: Organizational change, brands lost etc.

9. Out of Stocks at Store Level – Abnormally high out of stocks provide a clue that the retailer or distributor may have trouble with credit or payments and can not replenish warehouse inventory. Ask a store level clerk how long the product has been out of stock.

10. Unusual Bill-backs- During tough times, we see the emergence of unusual bill-backs. Look for higher cases sold on promotion versus history, increases in costs for promotional support, or unique fees or penalties assessed. For a while, some USA retailers made a fortune on “post audit deductions”. This practice involved an accounting firm who would process deduction for actions 2-3 years earlier. Since most manufacturers did not keep their records, these questionable deductions passed as valid.

11. Calls from Other Suppliers – There are few secrets in the industry. Veteran exporters pick up the phone and call an industry peer when something appears out of sync. I recall a flurry of activity and phone calls from frantic suppliers in advance of two high profile distributor bankruptcies in Europe.

12. Shipments lag behind expectations – All of the above activities impact shipments. Evaluate a distributor or retailer’s purchases and compare to overall market conditions or trends across your other markets. Why is this distributor or retailer out of sync with broader trends?