Clothing Vendors Take Chargeback Hit
The reality is this: large retail chains hold most of the
cards when dealing with designers of clothing and accessories. As a Crain’s
New York Business article
points out, retailers are levying all types of chargeback fees, legitimate
and questionable, and there is very little that most suppliers can do about
it other than go along.
Vano Haroutunian, a lawyer with Ballon Stoll Bader & Nadler,
said chargeback fees accounted for roughly five percent of yearly sales for
the firm’s clients 10 years ago. Today, that figure is roughly 20 percent.
"These costs have gotten more onerous," Mr. Haroutunian told Crain’s. "Retailers
are charging back for anything they decide they want to take from vendors."
Jed
Schlacter, another lawyer who represents manufacturers, said, "Vendors
are very frightened to talk about it because they might antagonize retailers.
If you don’t play ball with them, the retailers won’t do business with you
in the future."
Retailers dismiss many of the complaints about them arbitrarily
taking deductions from suppliers.
"Our vendors know that we are always willing to discuss our common goal
of getting floor-ready merchandise into the stores in an agreed-upon time frame," an
unidentified Macy’s spokesperson told Crain’s. "Our policies on
vendor chargebacks are well-known to our suppliers."
Discussion Questions: Are retailers imposing what amounts to frivolous chargeback
fees on manufacturers? Is the practice becoming more common as alleged by some
in the Crain’s article? What can vendors do to avoid being hit with undeserved
charges?
All I will say on this topic is this: If retailers actually accounted for all of the costs generated by the dysfunctional behavior internal to merchandising, marketing, and supply chain, so that they did not so often work at cross-purposes to each other, then retailers would not find it necessary to make up for these mistakes by charging manufacturers. Is there a cost to missed shipments, shorts, delays? Sure. Should it be practically a profit center internal to the retailer? No.
“Arbitrary” is a difficult choice of words. Are standards getting tighter? Yes. Unreasonably tighter? Maybe.
But RSR has found in our research that merchandise quality is a BIG issue. So I would also ask the question–are merchandise vendors appropriately auditing their products when they leave the factory?
Let’s face it. 10 years ago, no one thought Toyota would have any quality issues. Here were are, and new issues continue to surface, some of which have resulted in fines. Retailers take their own hits on their private label products…but everyone is making merchandise in the same factories, and generally not auditing adequately.
I’m not apologizing for retailers here at all. Some do behave badly. But we do have to ask ourselves whether or not product meets specifications.
I don’t know if it’s any more prevalent now or not, but when I was on the vendor side for an apparel company 30 years ago, it was routine for retailers to hit us up for 30% co-op advertising at 50-50, when our policy was 3% 50-50. We’d object, and they’d just deduct. When one retailer redid its fixturing in women’s apparel, our “share” of that (nobody asked us permission first) was over $100,000. We’d object, they’d deduct.
I had meetings with some of the retailers about the fees, and it quickly became clear that it was their way or the highway. My sales manager, a very key and powerful figure in any vendor company, was paid on commission and vigorously opposed any sanctions against retailers who were robbing us blind. So it just continued.
When the company I worked for was finally sold, there were millions on the balance sheet as “receivables” that were all just deductions we were never going to collect. You can bet that due diligence got weird. Anyway, to my mind at least, nothing new here.
Arbitrary? Hardly?
Justifiable? Maybe not.
Transparency is the enemy of onerous fees–provided manufacturers are willing to lose a little volume.
If, however, a manufacturer is unwilling to take a sales volume hit, they remain at the mercy of their retail partners.
Is there inefficiency on both sides of the buying table? Of course.
The real question though is what is more important–sales volume, cash flow, or efficiency?
The issue here is about shared gain, shared pain. From the retailer’s perspective, times have not exactly been the best, so why shouldn’t their vendor partners actually be partners? With slow sales, rising costs, and heavier competitive factors all weighing heavily on their minds, retailers are looking at ALL cost elements. And cost of goods, next to labor, is top of the charts. Prime targets. So, lowering those in any way possible (which is what chargebacks really are) is also top of the charts.
First of all, this practice is pervasive through all retailing, not just those involved in fashions. Further, it is not a new trend by any means. It has been going on for at least 40 years, and perhaps longer. As retailers become more important to the vendors the more egregious they got.
But, be assured, this is not a practice that the best retailers use. The retailers who use chargebacks for questionable reasons are also the ones that can be pinpointed as losing in the best practice race. This practice is being used as a substitute for good business management.
Retailers use chargebacks as a substitute for running their business properly. Rather than get their business in shape, they simple use the vendors to pad their bottom line. This practice is a sure sign that the retailer is focusing on bottom line in ways that are not a long-term solution to their problems. Identify the retailers that base their profits on chargebacks and sell them short.
This phenomena is hardly new, having been first deployed by the major department stores in the early ’80s. The ontology was pretty straightforward. With revenues well below plan, profits will be below forecasts given to the street and retailer’s stock will get hammered. Solution–artificially inflate margin rates (and reported profits) by creative chargebacks to the vendor. This lower retailer’s cost of goods sold and increases reported profits.
Over more than 20 years, these games have become increasingly exotic, including Gross Margin guarantees (regardless of sales performance), packaging violations (sometimes explained, sometimes not), and the ever popular “concealed shortage.” My personal favorite (I’m not making this up) is “anticipated concealed shortage” which is typically sent out just prior to a quarterly close before the merchandise has actually been received by the retailer.
The irony is that retailers, in going for these short-term profit boosts, have done incredible damage to both themselves and to the consumer. First of all, these chargebacks have resulted in the death of many new and small vendors who offered variety and innovation in the marketplace, but couldn’t survive these games financially. This resulted in a shrinking group of very large vendors who covered these specious costs by maintaining the wholesale price while reducing the quality of the garment. The end result is the boring, low-quality assortments that are so common today.
Finally, and potentially most damaging to the department stores, this zero sum approach to the vendor community is one of the key enablers of the rapid growth of the off-price industry (now well over $20 billion annually), which does all deals on a cash basis and works assiduously to maintain strong working relationships with their vendors. Having been a senior merchant for TJX, I can tell you first hand that off-pricers love the department stores for making their job so much easier.
We have seen this in the supermarket industry and called it a shift in the balance of power. It is also known as the Golden Rule of Retailing, “He who has the gold, rules.” In this case it is the retailer who is buying merchandise from the retailer. This is partially a result of the consolidation in retailers and the result of so many leaving the market through bankruptcy. There are simply fewer and fewer retailers for vendors to sell to.
On the other side, this bill back behavior is questionable, being the easy way out. Retailers should reduce their operating costs and focus efforts on sales, not take backs from vendors. The problem is, everyone is doing it and unless the vendor has a very strong line, they cannot call the shots.
Documentation is the key to transparency. Before doing the buy back, asking for documentation of the reason so that the situation can be improved provides transparency and precedence. If both parties were absolutely focused on getting products to the store that consumers wanted to purchase, buy backs that are seemingly arbitrary would be less of a problem because everyone would be making money.
I am certain this is much more common, and more commonly tolerated, with large retailers. Their smaller competitors could not get away with it as they do not have the same clout. As such, this would appear to violate the Robinson-Patman Act. The FTC should get off their duff and enforce that law or else Congress should repeal it.
I wrote a piece for Inc.com about a parallel subject, markdown money, five years ago. Here’s some of what I wrote then:
“For years, markdown money has been a part of the relationship between large retailers and their vendors. As originally conceived, markdown money compensated retailers when a specific style or grouping from a vendor turned out to be an unexpectedly weak seller. The retailer and the vendor shared the expense of liquidating the inventory.
But as time has gone along, things have changed. Retailers aren’t just asking for markdown help on troubled merchandise now, they’re asking for markdown help on everything. Markdown money has now become a revenue stream.
In the retail trade, it’s called “partnering with your vendors.” The vendors might instead call it a good old-fashioned shakedown.
Their vendors have gone along, as they always do, because of the size of the purchase orders. For a long time, the vendors understood how to play this game; they simply built the markdown money into their prices upfront, wink-wink, and everybody was happy. Except the retailers now treat markdown money just like revenue, and they expect to run increases every year.”
You could substitute “chargebacks” for “markdown money” and the story is the same. It’s about leverage. Large retailers don’t assess these charges because they should, they assess them because they can.
Is vendor performance really becoming worse with each passing season? Or is it that difficult trading conditions or insufficient skills are forcing buyers to take this easy road to margin?
It’s an open secret that merchandise quality and delays – the two most common causes for chargebacks – are easily overlooked when the market is hot and the product is in demand.
Chargebacks are a dangerous tool in the hands of a lazy, short-term thinking buyer who is incentivized on gross/realized margins; to him/her they are a quicker way to get to that bonus check for the season. Pragmatic vendors, for the most part, don’t want to antagonize the buyer because that risks not just business with the current retail customer, but any retailer that the buyer moves to in the future.
It’s ironic that vendors mainly cited as “partners” when it comes to sharing the retailer’s pain – I don’t recall any retailer calling vendors up to a stage for distributing checks to share extra margin in those very profitable years. I’d welcome comments from anyone who can remember that happening – we’ll all have something inspiring to quote in industry meets, then.
Lots of good comments here. There’s a viewpoint from both sides of the table. If a manufacturer creates a product that doesn’t sell to their and the retailers’ expectations, then they both have a stake in the game and the outcome.
Clearly for a manufacturer that has a product that is streaming off the shelves, this should not even enter the discussion, they have the leverage and can in all honesty cherry pick their channel to distribute their product working with the best retailers and leaving the second tier by the roadside. The company that comes best to mind on managing this process is Apple. They distribute in their own stores, in resellers and in super retailers like Best Buy. I hardly think that Best Buy or any other member of their channel administers chargebacks to Apple. If they did, I suspect that Apple would drop them as a channel partner in a heartbeat, why put up with that noise?
What the retailers and manufacturers fail on is collaboration. Most of them don’t really try to help each other be wildly successful, it’s all about mutual profit maximization, sometimes at the expense of the other. Nikki hit it on the head, work together and collaborate or continue to blow each others’ brains out on chargeback. If each of them could “see” better into consumer demand, than they could make adjustments, get slow selling products out of the channel and better selling products into the channel. Everyone makes a dog product now and then, it’s best to cull it out of the herd and free up the shelf and display space with a better performing product in terms of sales and revenue. Revenue is key and turns is the measurement. If you turn product and drive profitable revenue than the chargeback issue is mitigated. But this takes a win-win outlook to partnering which very few retailers embrace with their suppliers.