Misconceptions of the Clothing Industry
Many people have the wrong idea of what it means to “make it” in the clothing industry. Surprisingly, it takes a lot more than a few celebrity endorsements and an order from a department store. People lose sight of the fact thats it’s similar to any other type of business that requires steady sales along with controlled and predictable expenses.
I remember the first time our brand received an order from a large chain retailer. It happened to be Nordstroms. Two years after launching, it felt like a huge success to hang our hat on, we couldn’t be happier. I remember going through my emails on my phone while eating breakfast that day. The subject line said Purchase Order and the email stated that they will be testing us in 26 locations that they felt best fit our demographic. I immediately called my partner that was in charge of sales and needless to say, we were stoked. For a young company, it’s common to look at all victories, big or small, and use them as metaphoric building block towards your goal.
After pulling off that shipment, we received an order from Urban Outfitters. Great! Another big box retailer. Things are starting to pick up and we felt that pretty soon things will take off. If I were to tell you that there was a clothing line that was sold in Nordstroms, Urban Outfitters and also sold in over 100 boutique stores, that it must be a successful brand. If I told you that the feat was accomplished in just over two years than you would probably be even more impressed. On the outside, things looked great, even from where we were standing, we felt like we finally had our breakthrough. However, it wasn’t that simple.
For a small company without much capital, to work with these major retailers, you need to borrow money in order to fund these orders. The problem with that is now you owe money. With interest. So that turns into a dark cloud hovering over your head. What makes it even more difficult is that you don’t get paid for your order right away. You get paid 30–60 days after shipping the goods. So if manufacturing takes about 2–3 weeks and you need to wait an additional 60 days to receive payment, that’s a long time for a small brand to have those funds tied up. If you’re an established company with plenty of operating income to spare, it’s not a big deal. If you’re four guys with a shoestring budget, you need to borrow and hope that everything works out. What gets even trickier is that chain retailers expect a price break due to their volume. The problem was that their order wasn’t enough for us to get a discount in our production. So this ate into our margins significantly. So after the net payment terms pass and you finally receive that check, all you need to due is put that towards all that money you borrowed right? Wrong. By then, you have a ton of other expenses and orders that you need to allocate your funds toward in order to run your company. So what is the answer to remedy this? How do you avoid making these mistakes?
As a small brand you will have milestones. With these milestones come decisions. When to get a bigger warehouse, when to hire a sales team or whatever else that you feel you need to get to the next milestone. The problem with this is that you can get caught up in expenses. Expenses will eventually drown you if your revenues don’t grow at greater rate. For example, you may need a larger warehouse, but the larger warehouse will not yield an improvement in sales. Also, you must keep very close track of your stock to sales ratio. You need to know how much to produce in order to sell a certain amount. In the apparel industry, excess inventory is your greatest nemesis. The longer it sits there, the longer your funds are tied up. You must determine whether that amount is enough to maintain the financial health of the brand. When you receive a large order, you need to make sure you can handle such a load. Otherwise you will constantly be chasing your expenses. For this reason, sometimes you must hold off on certain offers until you know your brand is ready.
That order from Nordstoms was the first and last order we received. We posted a 80% 30-day sell thru rate (which is considered good) but it was in the midst of them changing their buyer. The new buyer that came in wasn’t a big fan of our style and we didn’t have much luck in winning her over. With Urban Outfitters we had a steady relationship for a few years but we never had a major breakthrough with them in terms of our sales. Our largest order with them was approximately 3000 units but it never translated into much for us because our margins were very little to begin with.
As an entrepreneur, you are perpetually an optimist. You have to be. If you don’t believe in what you’re doing, nobody else will get behind you. However you must also question and evaluate every decision. There is no such thing as a ‘no-brainer’. Things that might look great on the surface, might not be so after further review. Many successful business owners got to where they are because they knew when to say ‘no’.
What I learned the most from this industry is that you will constantly be making decisions. The decisions you make in the early stages truly impact your company in the future. It’s not the end of the world when a mistake is made, but the key is to recognize it early enough so it doesn’t have a lasting effect.