By Stevan Buxbaum, Executive V.P.

From everything we’ve seen so far, 2008 promises to be a challenging year for the retailing industry, wholesalers and secured lenders.

First came the results of the holiday shopping season, which confirmed that consumers have pulled back sharply from their earlier free-spending days. Retail sales for the period rose just 3%, the smallest gain since 2002.

The prospect of lower sales meant increased markdowns as the season developed, but even those weren’t enough to prevent a buildup of excess inventory. That means retailers now find themselves needing to be more vigilant than ever about the quality of that inventory and the depth of the markdowns they need to take to clear it.

The same is true on the wholesale side, where there also is excess inventory because a rise in order cancellations that occurred as the depth of the holiday slump became evident. As we know, it can be even more difficult for lenders to move inventory held by wholesalers.

"To clear their inventory, retailers need to take a two-pronged approach. Certainly, they need to sell it, but they must also determine what kinds of margins they can achieve in doing so. If they have to go deeper than expected on markdowns, they will be hurt by a reduction in their overall margins.

Even as that inventory is being cleared, new inventory is growing tighter, and that too presents retailers with a problem. The factoring community, seeing that consumer

spending is sliding, has tightened up on the amount of credit it is willing to extend to retailers, limiting the amount of goods manufacturers can ship and, in turn, putting pressure on the asset-based lending side.

A curious fact about retailers is that they get to borrow twice on the same inventory. The factors, who are aligned with the manufacturers, are the first to lend, since the goods they finance are being shipped to retailers on terms. Then the retailers borrow against that merchandise from the asset-based lender.

Naturally, the factoring community is getting concerned, and as a result it is tightening up on the amount of merchandise that can be shipped to retailers. That puts the retailer in a pinch, since sales can be affected if they can’t get all the inventory they need. This, in turn, affects the asset-based lenders because it can reduce the credit quality of the retailer’s inventory.

What’s the net impact of all this? It tells me that 2008 will be a difficult year. Stores will be carrying less inventory and distributors will see smaller orders from customers. The backdrop against which all this is occurring will be a continued slump in consumer spending.

It will undoubtedly be a year in which all the players will be required to exercise good judgment, smart planning and high levels of discipline if they are to not only survive, but prosper.