Our current economic climate has presented unforeseeable challenges to the retail industry. Retail sales saw marginal increases over the holiday and overall sales in 2008 saw the slowest gain in six years. As a result, the retail fixturing industry has also felt pressures from big-box clients looking to procure cost-effective fixtures and worry-free contracts. A declining U.S. dollar, increasing Chinese labor rates and diminishing tax rebates for Chinese exporters have forced many fixture providers to take a second look at long-term contracts and their bidding in reverse auctions.
When entering a contract, fixture providers use several inputs and indices to factor length and pricing of an agreement. A few short years ago a stable marketplace made it possible to enter in, for example, a relatively long-term, fixed-price contract after seeing raw material and freight costs remain relatively stable. In 2008, we witnessed unforeseeable increases in the costs of oil, nickel, steel, paper and plastic to name a few, leaving fixture manufacturers in long-term contracts with the option of entering a restructuring agreement or taking the brunt of the costs. So, in today’s marketplace, what incents buyers to enter into a comfortable relationship with a supplier?
Long-term vs. Short-term Contracts
A retailer contracts a fixture provider based of any number of variables including merchant requirements, material, lead time, pricing and/or length of contract. In order for a seller to reasonably project pricing over the course of the contract, they must forecast costs using indices such as the China Steel Price Index and inputs such as labor to accurately project pricing. The one thing that was always relied on was an increase in raw material costs as result of inflation and other economic factors. But what left many fixture manufacturers scrambling is the unforeseeable dramatic changes in these costs and the short period of time it happened. Steel and oil, for example, rose dramatically in 2008, then began to drop considerably in the fourth quarter.
Given our current economic situation, a long-term contract, e.g. three years, makes it extremely difficult to accurately forecast pricing. No one is for certain what the remainder of 2009 and 2010 holds, but one thing we do know is that by constructing short-term contracts we can reduce much of the forecasting dilemma. By shortening the length of the agreement, both buyer and seller are able to comfortably enter into a fixed-priced contract that greatly reduces the possibility of cancellation due a radical increase in costs.
Another option to allow for longer term contracts given current economic provisions is index-priced contracts, or economic adjusted pricing. Such agreements are called upon when economic factors make estimating future costs too unpredictable within a fixed-price contract. A seller calls upon appropriate indices to predict pricing over the course of a contract and only makes outlined adjustments when necessary. Just as a shorter contract reduces the dilemma of unforeseeable costs, economic adjusted pricing eliminates it. Though many retailers are wary of such an agreement, they are to be used sparingly and only when economic factors, including the current volatility of raw materials and labor, make it necessary. Such a contract makes it possible to enter a long-term agreement between retailer and fixture provider despite a turbulent marketplace.
While many agree the current marketplace proves to get worse before it gets better, the end of 2009 and 2010 look promising. Retail fixture providers will continue to value engineer designs and procure quality, cost-effective hardware from around the globe while keeping a finger on the pulse of the market to accurately estimate pricing to enter their next contract. So, when entering your next auction, what are you buying, fixtures or futures?
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