Take a Memo



Memo is a love/hate topic. Retailers generally love it, and manufacturers generally hate it. Used properly and judiciously, the practice of having some consigned merchandise at retail makes sense. Used carelessly, it breeds nothing but trouble for both the retailer and the manufacturer. • Originally, short-term memo enabled a retailer to bring in a particular piece or pieces for a specific customer. • Typically, the term of the memo was a few weeks. If the manufacturer got the sale, everyone was happy. If not, the merchandise was returned and no one was hurt. • Over time, memo became more and more important as retailers’ demands increased to the point that, unless memo was provided, the retailer would go with a competitor who did offer a program. Memos became addictive—spreading from diamonds to wedding rings to colored stones to virtually any product in a jewelry store. 

And why not? Manufacturers are offering you the opportunity to carry the burden of a significant portion of your investment in your own business. 

Your return on investment goes through the roof. Your risk in dead inventory evaporates. To top it off, the manufacturer is willing to buy your old inventory for what you paid for it. 

Well, if it sounds too good to be true, it probably is. As the economy changed and the country’s financial problems came home to roost, memo became the subject of much scrutiny. The bankruptcies of notable firms like Henry Dunay, Michael Beaudry, David Webb, Speidel, and Finlay can be traced back to the memo world. When he announced his Chapter 11 decision, Henry Dunay said, “Memo was one of the main reasons I had to do this.” Dunay couldn’t absorb “the decision of Neiman Marcus to take setoffs and not remit $3 million in funds owed for goods.” Not many firms could.

Other negative aspects of doing business on memo: higher prices and less involvement in the buying decision. Because there’s more risk involved, retailers must pay more for the goods—plus the cost of capital carried by the manufacturer. Those bigger price tags make the retailer less competitive. Even worse, the retailer loses some autonomy deciding which merchandise goes into his showcases.

At the September 2009 Rapaport Conference in New York City, several speakers addressed the controversial topic of memo. Consensus Advisors’ Christopher Ellis told participants to “rely less” on it. “Realize opportunities for cash buyers,” said Rob Broedelet of ABN Amro. “Banks are withdrawing industry support because capital is limited and costs more.” 

How prescient! If only we had listened.

I doubt that memo programs will ever disappear. They should: Their true cost is manifested in these Chapter 11 filings and countless other “write-offs” manufacturers and retailers take when trying to settle a memo reconciliation—even when Chapter 11 is not in play. As gem expert Richard- Drucker wrote several years ago, “Buying on memo replaced courage.”

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