Luxury Brands Gain Advantage in Saks Bankruptcy Payout Negotiations

Luxury Brands and Saks Bankruptcy

By Nicholas P. Brown

Critical Vendor Payments

NEW YORK, Jan 30 (Reuters) - Some of the world’s biggest luxury brands are quietly exerting their influence in talks with bankrupt Saks Global, pushing the retailer for favorable creditor treatment due to Saks' reliance on their high-end merchandise, according to seven people familiar with the discussions.

Challenges for Smaller Vendors

Saks, which filed for bankruptcy on January 14, has a court-approved pot of $120 million to split among vendors it considers essential. In most bankruptcies, these vendors are a hodge-podge of consultants, IT servicers and landlords with little leverage - languishing near the back of the payout line.

Impact of Retail Partnerships

But Saks' biggest trade vendors, which include Chanel, LVMH and Kering, are among the most exclusive and ubiquitous luxury brands in the world, and appear to have the edge in being designated "critical vendors" due to their ability to drive foot traffic, according to the people. The company is "absolutely dependent" on these brands, who could "suffocate" the retailer if they stopped shipping, said one of the people.

Critical vendor payments are not flowing yet, but Saks has indicated to some larger brands that they will ultimately make the cut, two of the people said. Smaller brands are having a harder time getting meetings with Saks leadership, three of the people said, with one calling Saks a "black box." 

Saks had no immediate comment on Friday.

Chanel has the largest claim at $136 million, Gucci owner Kering's is $60 million, and Louis Vuitton parent LVMH has a $26 million claim. None of those brands commented for this story. Ralph Lauren, Estee Lauder and Dolce & Gabbana are also among the vendors, albeit with smaller claims.

As unsecured creditors, vendors often walk away with nothing, and any recoveries that do come usually take months, said Melissa Jacoby, a professor and bankruptcy expert at UNC School of Law. Smaller, niche vendors of Saks are likely to be in this position, forced to decide whether to keep shipping to a retailer that doesn't see them as crucial.

Others were quick to note that the leverage is not one-sided -- the brands benefit from Saks, too. But all seven agreed it's rare for a retailer's image to be so dependent on stocking a small handful of labels. For that reason, being deemed "critical" in this case may entitle the brands not only to early claim payments, but to a greater say in how the case plays out, two of the people said. 

One person familiar with the brands' thinking said some are wary of Saks' recent partnership with Amazon - unenthused at the idea of selling luxury goods on a mass-market site - and could use the bankruptcy case to push back on it.

One wrinkle in the discussions: some brands operate under concession deals, owning their inventory until the moment of sale, and so aren't technically vendors. Two people involved in the discussions said those brands -- which include the largest claimant, Chanel -- could be paid through other revenue streams, freeing up the $120 million critical vendor pot for a wider swath of brands. 

Some small vendors are considering negotiating collectively, said a person familiar with the strategy, in hopes of persuading Saks it needs a wide variety of vendors to attract shoppers. But that may be a tough sell.

"I don't know how much Saks is really thinking about vendors it's not planning to give critical vendor dollars to," said one person involved in discussions. 

(Reporting by Nicholas P. Brown; editing by Diane Craft)