Middle Market Retailers Experiencing Growth Through Digital Transformation
Industry Executives Gather in San Diego for CFA’s 74th Annual Convention
Originally published in TSL Express
By Michele Ocejo
The Commercial Finance Association celebrated its 74th Convention in San Diego, November 7-9, 2018. CFA’s Annual Convention is the premier event for the asset-based lending, factoring and trade finance industries, with high-quality education and networking opportunities at the event underscoring the positive energy of the industry executives in attendance. CFA’s new name was revealed by Richard Gumbrecht, CEO, on Thursday, during the General Session.
“The feedback on this year’s Annual Meeting in San Diego has been tremendously positive. People loved the opening reception with Ziggy Marley and I heard great things about the diverse panel topics and dynamic speakers who inspired some valuable ideas. As always, the networking was excellent. Of course, one of the big takeaways was the announcement that CFA will be rebranding as the Secured Finance Network later in 2019 to make the CFA brand more relevant to our members and to reinforce our strategic direction. The response to this has been very positive.” Gumbrecht said.
The Convention got off to a rockin’ start with an outdoor concert featuring Ziggy Marley during the Wednesday night Opening Reception. Beth Comstock, former vice chair of GE, illustrated the importance of being able to adapt to and bring about change during Thursday’s General Session. Thursday’s lunch speaker was economist Robert F. Wescot, Ph.D., president of Keybridge, and Friday’s lunch featured UGG founder, Brian Smith.
The top-quality panels included topics such as, views from the top from both the large ABL players and the entrepreneurial viewpoint, overview of the retail industry, technology’s effect on the industry and the many faces of junior capital. No matter which market you serve, this year’s CFA Annual Convention truly offered something for everyone.
Attendees raved about the panel Retail Finance in the
Internet Amazon Age Panel. Nathan Wong, vice president, Gerber Finance, Inc., commented, “I thought the panel was a great opportunity to hear perspectives from people who are actually in the industry vs. reading it in a magazine or an article. It was very interesting and informative.”
“The panel was fantastic. It covered some great topics. From the UK perspective, it was nice to see what is going on in the U.S. It was tremendous, well done, “said Steven Chait, managing director, Wells Fargo Capital Finance.
“The online retail sales part was very interesting for me, in particular with groceries, where we see the U.S. market is a little bit smaller in percentage terms than the UK market. I think we will probably see some growth in the U.S. market in online grocery shopping. In terms of the dominance of Amazon, the prediction that it will go to 54% of online sales from 40% now by 2027 seemed to be potentially understating the Amazon dominance. It wouldn’t surprise me if they reach that more-than-50% far sooner than 2027 because they are growing at an incredibly fast rate at the moment.
The number of bankruptcies in the retail space has been quite interesting. It was surprising to hear that it was a smaller absolute number in the U.S. in 2018 than in 2017. If there is a 5.8 percent bump up in their holiday sales this year as predicted by the panelists, then hopefully that means that the number of bankruptcies in 2019 will be less than in 2018,” said Georgia Quenby, partner, Morgan Lewis, London, UK.
Panelists included Ramez Toubassy, president, Brands, Gordon Brothers; Christa Hart, senior managing director, FTI Consulting; Lynn Whitmore, managing director, Wells Fargo Capital Finance; and Daniel Fiorillo, partner, Otterbourg P.C. Irene Marks, executive vice president, head of retail, Wells Fargo, moderated.
Toubassy commented on what he sees as the three primary elements that drive success today, online and in-stores: convenience, personalization, and experimentation. “There is really great and interesting innovation going on right now in retail. Nordstrom Local is a 1,200-3,000 square foot store concept. It plays on the promise of the Nordstrom experience of service and experience. They have a stylist with an iPad, a shoe fitter, and zero inventory,” Toubassy shared. “And with Amazon, their acquisition of Whole Foods is just the beginning. While it’s expected to revolutionize the online grocery business, it also enhances their model by introducing cross-channel discounting, order-pick up options, and supporting their fulfillment operations with the store footprint. They’re applying digital principles that they’ve perfected to traditional retail too with Amazon Go and their physical bookstores. It’s an incredibly interesting time for retail and Amazon and other retailers like Nordstrom are paving the way,” he added.
“Dollar stores are doing great and building out thousands of brick-and-mortar stores. But they are most susceptible to tariffs,” said Lynn Whitmore, managing director, Wells Fargo Capital Finance. “Who is succeeding also means who is competing well against Amazon.”
Hart discussed the categories dominating online shopping: “We see changes in the way people shop online and how they shop categories online. We go from a high of books at 70% online, all the way down to grocery, which is about 5% online. In the middle you see categories like clothing, jewelry and health and beauty. Beyond the shift to online purchases, the influence that online has on the way people purchase in the stores is equally important. Retailers have relatively large fixed costs so if they lose 10-15% of their store revenue, it makes a huge impact on their bottom line,”
According to FTI’s Holiday Report, they are expecting 5.8% growth. “The consumer confidence level is very high, but we usually don’t stay this confident for long. Falling consumer confidence can be a good indication of a recession,” said Hart.
The panelists touched on the recent wave of bankruptcies: “Vendors are much quicker to walk away from this go around of bankruptcies. They are not shipping into bad situations. If factor support goes away, they know it’s not the best bet. They are taking the hit early rather than being a member of the unsecured creditors committee when it’s too late,” Whitmore said.
Toubassy discussed owning Wet Seal, which Gordon Brothers bought after Chapter 22 (two successive Chapter 11 filings). He explained that half the bankrupt retailers are now brand companies. “They are companies where the owner owns the brand and effectively licenses it out. They spend all their time creating consumer value and trying to innovate. We think this is a big piece of the future.”
The View from the Top: Large ABL Lenders panel included a new feature: audience members were able to vote on a series of questions posed by the moderator, Michael Scolaro of BMO Harris Bank, to see the voting results click here. Panelists included Bill Kosis, PNC Business Credit; Paul Cronin, KeyBank Business Capital; Kurt Marsden, Wells Fargo Capital Finance; and Karen Sessions, Bank of America Business Capital.
When asked if and how they were changing product offerings in order to grow, 45% of audience members replied they were offering new products. Cronin offered his view: “Future growth in ABL will come from a softening economy and declining credit quality over the next 24 months. Lenders who are not relationship-based will withdraw from the market, and ABL will once again be the financing solution for impacted borrowers.” Kosis said PNC has emphasized global expansion. “We’ve grown our international business over the last ten years,” he said. 24% of the audience agreed their growth would come from geographic expansion. Sessions explained, “At Bank of America, we are focused on our responsible growth strategy, which includes supporting our clients and increasing internal referrals.” Marsden added, “At Wells Fargo, we think beyond ABL and focus on how we can help our customers with their needs. We try to connect the dots across Wells Fargo in order to increase growth.”
Regulation was voted the “biggest hurdle” for large lenders. Marden said, “In my opinion, regulation is here to stay. I find that over time, we learn how to manage it more efficiently.” He also commented on the effect of tariffs, saying, “We’re looking at the impact tariffs will have on our business and on our customers. The picture is unclear because some customers are affected in a negative way, but tariffs can also open up new opportunities for others that offset the negative effects. We know there will be some long-term implications in certain industries so we continue to closely monitoring this situation.”
Scolaro told the audience about another obstacle he has witnessed, “We’re seeing customers facing employment shortages, especially rural manufacturers. It’s affecting their ability to expand.”
The panel also discussed talent management, including recruiting and retaining recent college graduates. Cronin said, “At Key, we provide an inclusive organizational structure and environment where all people are engaged, valued and respected. We have a robust intern and analyst program and invest in recruiting and training millennials, as well as all generations of top talent across the bank.”
At Wells Fargo, Marsden explained they have altered the way their management committee is structured in order to improve diversity of thought. “We handpicked future leaders to be on our Management Committee. It’s a great way to have them weigh in on the strategic direction of the business and gain a sense of ownership. We resultantly believe that we have brought the right minds together to tackle our challenges,” he said.
When the discussion changed to what skills are needed in today’s environment, Sessions echoed what keynote speaker Beth Comstock emphasized, “We need people willing to do more than just keeping the machine running, but instead, making it run faster and more efficiently.”
The panel The Many Faces of “Junior Capital”: Solutions and Trends focused on how private debt lenders, an investment banking professional and a private equity professional look at how to solve the riddle of getting the liquidity needed, using assets and cash flow, a FILO, a unitranche, first lien/second lien or a split collateral arrangement. They also provided their insights as to why one approach will work better than another in any given situation and the challenges of each.
Allan Allweiss, senior managing director of LBC Credit Partners, Inc. served as moderator. Panelists included Charles Collie, Managing Director, Prophet Equity; Mark Gertzof, The TCW Group; Chris Hebble, Houlihan Lokey; and Steve Hinrichs, Monroe Capital LLC.
Collie discussed the process of reaching out to lenders. “We probably look at roughly 1,000 transactions a year. That being said, half of those are transactions we wouldn’t do, and we can tell right off the bat that they won’t work, whether its size or industry. If it’s a transaction we may think is of interest, we will sign a CA, get the CIM, and then start our process. Our process on the finance side at least as far as looking at reviewing the transaction, it takes a while to get there. You first have to determine if this company is strategically viable and if it has a reason to exist. You do a lot of groundwork before you get to finance. But once you’ve done all the legwork to get to that point, then you’re trying to figure out, what am I willing to offer in an IOI. You have the 60/40 rule; 60% debt, 40% equity is kind of the norm now, at least from our perspective. We’ll start with the senior lenders and find out what they’re willing to do in the transaction and get a leverage read from them. If their package is a one-stop shop, we’ll use that for determining what our offer will be. But if that’s not what we’re getting out of the lender, if it’s just senior debt, we’ll go to a Monroe or an LBC, to find out what they’re willing to do behind the senior capital. That will help us determine what our offering price is.”
Gertzof added: “80% to 90% of the transactions we’ve done, TCW is doing the term loan and there is an asset-based lender doing the revolver. I think the products go really well together for a whole host of reasons. There is an averaging of the lower-priced asset-based capital with the higher- priced term loan. With this combination we can compete against corporate cash-flow deals by banks with better certainty of execution and no syndication meeting or credit rating. It also allows the company to maintain their existing banking relationships.”
Be sure to save the date for CFA’s 75th Annual Convention in New York City, November 13-15, 2019. David Morse of Otterbourg P.C., who will be serving as the 2019 Convention Program Committee chair, said, “I am really looking forward to the CFA 2019 Annual Convention here in New York. With all that is going on in the City, the great resources and the variety of activities available, it should be a fantastic event. No doubt everyone will be here, with great opportunities for networking and a chance to catch informative panels on critical matters that impact our industry.”