JCK Special Report: M & M, Part 2

This article originally ran in the September issue of JCK.

Last month I discussed margins. This month it’s the other "M"-memo.

The industry has a love/hate relationship with it. It has a bad name because suppliers think retailers abuse it; because it doesn’t protect the interests of the supplier in case of a retailer bankruptcy; and because suppliers never seem to make enough money on memo to justify it. But memo can be an effective tool for both parties-if used properly.

Memo will remain and maybe even grow. Retailers will be looking for additional banking in a time of restricted bank credit, and memo is just another form of banking. Suppliers, especially stronger ones, will be tempted to use memo to push out weaker competitors. Nearly everyone will look for ways to move stagnant merchandise, and memo has long been used for that.

Memo has many variations on its terms and conditions. At its simplest, it’s used for calls from retailers who have a customer with a specific need. That may be a diamond or a particular piece of jewelry. Memo also can be used as an inducement to buy other goods; as a booster for the Christmas season, when suppliers want to put all their merchandise to work; or as ongoing programs that fill a particular retailer need.

In these cases, it’s important to set rules or policies that maximize chances for success. With special calls, shipping and insurance should not be endlessly free. The retailer should pay on returned stones if, for example, it’s the third call and still no sale. The retailer should be asked if other stones are coming from other suppliers. If yes, then maybe the supplier should pass, or maybe the retailer should pay shipping and handling costs. Retailers should be honest about how they bring in memo. Some suppliers have stopped filling calls because their success rate is so low. Perhaps that requires a frank conversation with retailers, and even a written agreement.

Longer-term memos need well-constructed systems and controls. To start, the supplier has to determine that the goods do not compete with any other goods in the store, memo or asset. A supplier should have a clear shot at making the sales in that range and category. Sales should be frequently analyzed for sell-through, and below-standard pieces recalled. Good styles should be on automatic reorder (if it’s a continuing memo program), an important way to maximize sell-through for the supplier. Payments should be prompt, and there are ways to assure that. Suppliers should check stocks to see if sales are not reported as agreed, and that could be cause for pulling back the assortment.

Seasonal memos have part of these conditions. It’s important to carefully select what is shipped. Competing with owned merchandise is a bad idea for both parties, but it happens. Settlement is usually on one date, but if more goods are asked for during the season, some payment should be made on items already sold.

All memo business should include proper filing of UCCs, specific agreements between retailers and suppliers on the conditions of the memo and handling of cash proceeds from their sale, and commitments from both sides on what each will do. Recently suppliers have been hurt badly in retailer bankruptcies, but JVC and various law firms are making concerted efforts to educate suppliers on how to protect themselves.

We’re a long way from everyone cooperating to make memo successful. Suppliers need to construct the right memo program and assess how well retailers run them. Retailers have resented demands for proper documentation and protection of the supplier’s interests. It’s time for retailers to fully cooperate with suppliers on creating proper arrangements and accepting the right goods on memo.

Finlay, which dominated the leased department channel in the United States, is in difficulties. Whatever went wrong, Finlay established an effective, fully computerized memo system. Their suppliers, 90 percent of which provided goods on memo, saw that Finlay carefully merchandised and controlled their goods, eliminated losers (sometimes by selling them down for the vendors), and made sure payments were on the button.

Serious people looking for serious partners can use memo for mutual profit.

benjanow@gmail.com