By  on June 12, 2006

NEW YORK — The issue of chargebacks and vendor allowances is likely to remain a hot button this year now that Federated Department Stores Inc. is integrating its May Department Stores Co. acquisition and charging vendors a 5 percent "new store allowance."

Sources said Federated held a logistics and operational meeting mid-April at which they laid out their plan for transitioning the May stores to Federated. Several vendor representatives who attended the meeting, and who requested anonymity, said Federated told attendees they were treating the newly converted May stores as "new doors." What irked the vendors was the plan by Federated to exact a 5 percent "new store allowance" for the converted doors. About 400 May doors will be converted into Federated doors, making up about half of the total store count for the new post-merger Federated.

One attendee said the discounts are being applied to orders written months ago for the corresponding May stores. Since the application of the 5 percent is not for future orders, and past orders for goods were already priced out, vendors impacted by the 5 percent extraction can expect to see little or no margins on those orders.

A spokeswoman for Federated did not return phone calls for comment.

One Seventh Avenue apparel executive who has lived through several past retail mergers observed, "This is the first time I've seen it," referring to Federated's store allowance. The executive added that the way Federated is defining "new door is not the concept that most people" would understand, based on past industry practices.

Allan Ellinger, senior managing director at Marketing Management Group, explained that a "new store allowance" typically is sought by retailers when they are building out an empty store and are stocking the store from scratch. "Since the store is closed, it is not generating business. The allowance helps to defray some of the costs in starting up the store."

In Ellinger's opinion, the May stores are already in existence and operational, and all that Federated is doing is transitioning the stores to the Macy's nameplate. "The other concern is that the 5 percent [allowance] doesn't immunize the vendors from end-season markdown allowances, which means vendors are getting hit twice on the same goods."

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