Paper Source's Surprise Chapter 11 Filing Causes Paper Goods Sellers to Rethink Retail Strategy

Small vendors were blindsided by the bankruptcy news. “I don’t have the bandwidth to be burned again."
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Francis Scialabba

6 min read

For small businesses, one wholesale partnership with a large retailer unlocks the promise of a broader customer base and a bigger payday. That’s why Julie Stewart, owner of the Los Angeles-based stationery company Kiss and Punch, waited three years to land her partnership with Paper Source—the paper goods chain that recently filed for bankruptcy.

“From anyone else I knew in the stationery business, Paper Source was the one retailer that you wanted to be in,” Stewart told Retail Brew. When she scored her shelf space, “it felt like I finally got into my dream store.”

Ask many cardmakers or party suppliers to name their dream wholesale account pre-2021, and like Stewart, they’d point to their nearest Paper Source. While Paper Source’s footprint is small by some retail standards (158 US stores), industry insiders told Retail Brew the chain is often their largest partner.

With its nationwide reach and potential exposure to new customers, Paper Source has been “the golden account,” said Alex Gagné Glover, founder of Chez Gagné in Los Angeles.

But that was then. On March 2, Paper Source filed for Chapter 11 bankruptcy, avoiding on-time payment obligations to its vendors and tarnishing its “golden” reputation along the way. Now, a half-dozen independent paper goods business owners told Retail Brew the abrupt restructuring has forced them to reassess how they partner with national retailers, if at all.

At the very least, small vendors are treading more lightly than before. They’re balancing their retail growth ambitions with hopes of safeguarding their businesses in case of another curveball Chapter 11 filing.

Changing the channel

Throughout January and February, Paper Source called in unusually large orders to several small businesses—orders that can make a shop’s year—several outlets have reported. The increase in orders struck Lisa Mohar, the owner and sole employee of Rhino Parade in Brooklyn, NY, as signs of a turnaround after 2020’s challenges.

Like many other retail categories, the pandemic strained the $7 billion US greeting card industry. Wholesale business slowed when stores (including Paper Source) temporarily closed for social distancing, and any increase in online sales during the holiday season didn’t recoup the difference.

When Paper Source began ordering more inventory, “I was at a spot where I was like, ‘This is good. I'm moving forward. I'm doing what I need to do,’” Mohar, who’s worked with Paper Source for two years, told us.

Then Paper Source filed for bankruptcy on March 2.

Card sellers said Paper Source made those orders knowing a bankruptcy filing would relieve its payment obligations; Paper Source told Bloomberg it was to boost inventory in the ~27 storefronts it acquired from Papyrus last year. “We apologize for the inconvenience this brings to the community of makers for Paper Source,” the company said.

It’s a big inconvenience: The New York Times reports Paper Source now owes roughly 250 businesses amounts ranging from $8,000 to more than $20,000. Many of those businesses are women-owned and operated, with small teams.

“It's tough because we are actively looking for large retailers,” Natalie Bowman, co-owner of Tacoma, WA-based party supplier Oh Happy Day, told Retail Brew. Bowman had worked with Paper Source for four years, and it made up about 40% of her brand’s wholesale accounts.

“I definitely have a much stronger sense of distrust or uncertainty [now],” Bowman said. “But I'm not sure as a small business how much clout I have to actually influence anything.”

Kiss and Punch stationery at Hazel + Dot, a Tampa, FL, boutique. Courtesy of Julie Stewart

Gagné Glover said her Paper Source experience has altered her criteria for considering partnerships with mass retail—like taking a closer look at their earnings and cash flow if they’re publicly traded—but she isn’t removing large retailers from her wholesale lineup entirely.

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Then there’s the nature of retail relationships: After feeling devalued by their Paper Source experiences, Bowman and Mohar both mentioned rethinking the payment terms and discounts they pitch to retailers.

“If a bigger store is not willing to negotiate or value my product, then it's not a good fit,” Mohar said. “Because I don't have the bandwidth to be burned again.”

Katie Hunt, founder of entrepreneurial coaching service Proof to Product, told Retail Brew she’s instructing her stationery clients to build protective guardrails into their wholesale retail relationships from the beginning. Those include running credit checks and exploring insurance options.

When small businesses run into trouble with national retailers, industry talking heads often pitch a swerve to DTC. But direct digital sales were a mixed bag for the sellers we spoke to.

Gagné Glover told Retail Brew Chez Gagné’s DTC sales increased 135% last year to $116,289.27, its highest DTC sales to date. Meanwhile, Shayna Norwood of Steel Petal Press said DTC wasn’t as strong for her company as her store or wholesale partnerships. She’s evaluating new wholesale outlets for her Chicago studio on a case-by-case basis.

With unexpected responsibilities—researching legal aid, filing missing payment claims, even talking to the press—piling up on the small businesses who relied on big-ticket sales from Paper Source, many sellers say they need more time to figure out what’s next. Stewart of Kiss and Punch told us she’s torn about making any hasty decisions about her business model.

“I do know that I want to diversify my customers, because when I did the numbers and [saw Paper Source was] 50% of 2019, it's hard to swallow that,” Stewart said. She’s also leaning toward digital, after Etsy and direct sales both “went way up” in 2020.

Oh Happy Day party supplies. Courtesy of Natalie Bowman

One distribution outlet remains a certainty: mom-and-pop shops throughout the US. Every seller we spoke to said these stores allow them to maintain strong wholesale revenue while supporting likeminded local businesses.

Focusing on neighborhood stores “could ultimately recover the Paper Source revenue and do it in a way that supports the community that I would prefer to be supporting,” Bowman told us.

“We need to support each other more than a large corporation needs our support,” Norwood told Retail Brew. But she said it’s too early for Steel Petal Press to walk away from nationwide chains. “I'm not writing off partnerships with large retailers at all, nor am I even writing off a future partnership with Paper Source.”

“Will it keep us from working with them in the future? I wouldn't flat out say that,” said Chad Gleason, owner of Moglea, a stationery studio in Des Moines, IA. After nearly three years with Paper Source, the retailer accounts for less than 5% of the Moglea’s wholesale business. Instead, Gleason's label tends to focus on local stores.

Still, “I think that this will certainly make Moglea take a step back and be a little bit more conservative with those business relationships.”

Paper Source or no Paper Source, Gagné Glover hopes the retailer’s unraveling won’t discourage future entrepreneurs from entering the stationery industry. “It didn't kill our business,” she said. “It's just allowed us to get even more creative and find new outlets.”

Retail news that keeps industry pros in the know

Retail Brew delivers the latest retail industry news and insights surrounding marketing, DTC, and e-commerce to keep leaders and decision-makers up to date.