Rania V. Sedhom is managing partner at Sedhom Law Group
Saks Fifth Avenue is potentially going to file for bankruptcy imminently.
Saks Off 5th closed its brick-and-mortar store on East 57th Street and continues to operate online for now. The closure is part of a larger plan to shutter 9 Saks Off Fifth stores.
The plan will roll out across the country this month. But Saks Fifth Avenue’s flagship store is not immune to financial distress.
Hidden costs
We’ve all read multiple stories about how Saks Fifth Avenue and other Hudson Bay-owned luxury retailers are struggling to pay their bills, so much so that some retailers are reportedly not paying brands for consigned goods they’ve sold.
So, what does bankruptcy mean for consigners and consumers who hold gift cards or have credit with the store? For consigners who did not protect their interests in advance of Saks’ filing for bankruptcy, they will be treated as unsecured creditors, and their products will become part of the bankruptcy estate.
In other words, the products will not be returned to them. To protect themselves, consigners should enter into a consignment agreement that grants the consigning brand a purchase money security interest in the consigned goods.
The consignment agreement should also provide that title to, and ownership of the consigned goods, remain with the brand until the goods are sold, but the risk of loss remains with the consignee.
If that verbiage appears in the agreement, the consignor brand should take the following steps to secure its interest and product. First, file a UCC-1 financing statement in the appropriate jurisdiction describing the consigned goods before it ships the merchandise.
Second, send a written notice to all other parties with liens in the consignee’s inventory, advising them of the lien you filed and include a description of your merchandise and, if applicable, file a continuation UCC every five years with a new notice. Otherwise, the consigned goods will be considered owned by the retailer.
Consigners and consumers
As for consumers, a company filing for bankruptcy may not honor gift cards and store credit. There certainly is no mandate to honor them. Now, many consumers are worried that they will be left behind with valueless Saks store credit and gift cards.
There’s been a flurry of consumers utilizing those cards and credits this year in order to avoid forfeiting their value. Even if Saks intends to honor the gift cards and store credit, the bankruptcy trustee will have ultimate control over the estate, so the consumers’ concern is valid.
Communicate to maintain customer loyalty
Since an imminent bankruptcy would lead to a restructuring rather than a store or company closure, it is in Saks’ and other retailers’ best interests to maintain customer and consignor loyalty. Some important measures to consider are:
- Truthful and thoughtful communication. Explain the situation and tell customers how this happened and what is being done to pave a successful path forward.
- Augment customer service. Rebuilding trust will be a key to success post-bankruptcy. Be certain to fulfill all promises and demonstrate responsiveness. Training customer service and salespeople to properly communicate with upset customers in a respectful way is of paramount importance.
- Provide incentives. Show customers that you can reward loyalty by providing them with a generous rewards program or other incentives to maintain or renew their relationship.
- Transform your reputation. Take responsibility for the past and advise everyone on new strategies that promote growth and innovation.
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