As a supplier, has a buyer ever tried to sell you dreams of a long-term relationship, repleat with lots of business opportunities and a harmonious partnership? You hear all the right key words: long-term, partnership, mutually beneficial, increased business, trust, win-win. It goes something like this: we may be beating you down on your customary price because it will be worth a lot of business in the future. Is this a pitch or a partnership? Then you realize that the dreams may be based on an ugly reality — the buyer wants to trade for partnership futures. How about a deal where the customer wants to sell inventory back to the supplier for cash, and not even its own inventory, for a promise of future orders?
In the case of jewelry chain Zales, the deal is too good to be true — but for the customer, not the suppliers. A recent WSJ article, ”Struggling Zales Looks to Suppliers for Cash“ described how, in a bold and desperate move, the struggling company is trying to get its vendors to buy back inventory, including inventory that these suppliers did not even sell to Zales in the first place. And what do these suppliers get in return? The opportunity to sell 2 times the amount of product back to Zales over the next near. Not surprisingly, it’s a deal with no appeal and a risky non-starter for the suppliers. The oddest aspect of the situation is that Zales is trying to get rid of inventory before Valentine’s Day and Mother’s Day, holidays that account for the most jewelry sales after Christmas. Talk about trying to initiate a downward spiral. If the supplier inventory buyback were to occur, there would be little to attract customers into the stores, and sales would surely continue to plummet. Just the suggestion of such a buyback from a vendor who is close to bankruptcy would make suppliers head to the exits. Suppliers would be putting themselves in a risky financial situation, if their boards or creditors would allow them to enter into this type of agreement in the first place. Word of financial distress could spread through Zales suppliers like a brush fire and no one may be willing to ship to Zales, not only pushing Zales into bankruptcy, but putting suppliers themselves at risk and potentially impacting the more successful jewelry chain such as Signet Jewelers, owner of Kay Jewelers and Jared the Galleria of Jewelry.
While so far suppliers don’t seem to be going for this inventory buyback deal, it sounds like there is no silving lining to the situation. Either way, the suppliers may lose.
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