By and  on December 28, 2005

NEW YORK - After years of chargeback compliance, vendors threw down the gauntlet this year by taking several retailers to court and forming a coalition aimed at making the practice more fair.

Although it's too early to predict how this drama will play out, one thing is clear: A large percentage of vendors said this year was one of the worst years for chargebacks, according to a survey of online subscribers conducted exclusively for WWD by Demographix during the third quarter of 2005. There were 98 respondents; 27 were retailers and 71 were either vendors, suppliers or manufacturers. A large number of retailers admit that chargeback abuses claimed by vendors is a serious problem.

And if 2005 appears to have been a watershed year, 2006 might prove to be worse as both retailers and vendors head into markdown-money season. Many retailers now are focused on aggressive price promotions during the post-holiday rush, and consumers with gift cards in their pockets are expected to take full advantage of the sales. However, retailers are said to be keen on getting spring merchandise quickly onto their selling floors, and that might mean deeper discounts to get consumers to buy. But those discounts come at a price: lower margins for retailers, with many vendors expected to make up the difference.

That would help many consumers redeeming gift cards, as some consumers are expected to take advantage of the sales.

In WWD's online survey, 37 percent of retailers polled said chargeback abuses claimed by vendors were "very serious," while 47 percent said vendor claims were "somewhat serious." Sixteen percent said they were "not at all serious."

Of the retailers polled, 37 percent agreed that many retailers "truly abuse" the practice. However, 42 percent of the respondents said vendors complain about chargebacks because they are looking to "cut costs that they should, in fact, bear." Twenty-one percent of the retailers polled said vendors complain about chargeback compliance as an "excuse for inept shipping, poor product quality or other vendor responsibilities."

Retailers such as Saks Inc., Federated Department Stores, and J.C. Penney have stringent compliance requirements. Saks Inc.'s Vendor Standards Manual is 33 pages long, and includes compliance requirements ranging from apparel hangers to belt labels. Saks' electronic data interchange mapping specifications are covered in a separate, 49-page document telling vendors that "EDI is a requirement for doing business with Saks Inc." The EDI mapping specs cover label placement on shipping cartons, invoice formats and electronic purchase orders.In simple terms, if a vendor does not comply, they are charged by the retailer. Other compliance issues that involve chargebacks include shipping time infractions and slotting fees as well as picking up the tab for advertising, among other things.

Retailers see vendor compliance polices and chargebacks as a needed tool to keep operations running as efficiently as possible, which bolsters their bottom lines. From the vendors' point of view, compliance can be a costly headache. And for smaller vendors, compliance can be a barrier to doing business.

Of the vendors surveyed by WWD, 38 percent described 2005 as the worst year for chargebacks, while 24 percent said 2004 was the worst. Thirty-two percent said chargebacks are "equally bad, all years."

Of the retailers that enforce chargebacks, Federated Department Stores was cited as the toughest by 27 percent of the vendor respondents. J.C. Penney was the second toughest enforcer with 17 percent of the vote, while Saks Inc. garnered 12 percent.

Vendors said EDI and shipping time infractions were the two top, most serious chargeback issues, which were followed by customer returns and mislabeling.

One dark area in the practice that is rarely discussed openly is chargebacks involving markdowns, which occurs when goods are put on sale and the balance is charged back to the vendor. Legal experts tend to see these types of chargebacks as "improper."

To say chargebacks is a contentious issue may be an understatement. And recently, it's grabbed more headlines.

Earlier this month, bankrupt Adamson Apparel Inc. filed a federal lawsuit against Saks Inc. alleging breach of contract for various forms of improper chargebacks. The lawsuit said the charges for late payments, offsets and improper discounts resulted in "tens of millions of dollars in ill-gotten revenue" for Saks, and that the retailer "used the offsets and discounts as a source of extra profit in their operations." The suit was filed in U.S. District Court in Birmingham, Ala., where Saks Inc. is based.

Adamson Apparel is seeking class-action status for all vendors selling goods to Saks and due payment from Dec. 8, 1999, until a judge issues class-action certification. The plaintiff also is seeking compensatory damages, restitution and court-related costs.Separately, Saks is under investigation by the Securities and Exchange Commission and the U.S. Attorney's Office in Manhattan after it undertook an internal probe on excessive allowances for markdowns on unsold goods. Saks' inquiry was subsequently expanded to include chargebacks.

The Adamson lawsuit is the third of its kind this year. Saks was involved in two separate lawsuits over excessive markdown allowances and chargebacks at its Saks Fifth Avenue division. The lawsuit filed by Onward Kashiyama on markdowns has been settled and the second, by International Design Concepts, is pending.

Of course, manufacturers have been grousing for years about the enforced practice of "givebacks" after they've supposedly "sold" their goods to retailers with confirmed terms. Retailers buy from their suppliers to fill their racks and shelves. When the stores don't reach their expected profit margins, either because the goods don't catch on with consumers or the items sell at deeply discounted prices, they return to their vendors and "ask" them to share the retailers' pain.

Vendors, some say, would rather ship when and how they want and aren't thrilled about being charged for noncompliance. Besides, each retailer has its own set of requirements, and there are too many rules to track. Retailers, who each have their own logistical requirements, say they'd prefer to have no chargebacks, because noncompliance causes processing delays. The charges, they argue, merely reflect the costs to correct the problems at hand.

The practice has spawned a small industry of firms selling specialized software to help vendors meet compliance requirements and lessen the chance of a chargeback. They say the software can enable vendors to create a paper trail to help prove when certain charges are deemed improper. Despite the software programs available, the practice of chargebacks still exists, and is likely to continue. After all, from a retailer's point of view, either a vendor is in compliance or it isn't. Case closed. Vendors charge the process is unfair when one noncompliance can give rise to multiple charges for the same wrong. "Foul play" is their battle cry.

Comments from industry executives suggest there's very little middle ground.

"Nobody likes to be told they did something wrong," said Myron "Mike" Ullman, chairman and chief executive officer of J.C. Penney. "We're buyers, and vendors have a choice either to sell to us or not to sell to us. The amount that we charge back is what we think the cost is to fix it."According to Ullman, communication can be an issue because oftentimes the top executives at some manufacturing firms aren't even told by their subordinates the reasons for the charges. He explained that, once the executives are told what they are being charged for and why, the problem is usually corrected.

"The chargeback is [often] less than our cost to fix it. I like to not have to charge back [a vendor]," Ullman disclosed.

Jack Mitchell, chairman and ceo of Mitchells/Richards/Marsh's, said as a smaller retailer, "we don't do a lot of chargebacks."

Mitchell explained that family members work with long-term vendors and "we have a great relationship with them due to a lot of communication. It is not a big issue for us."

Still, for vendors that sell mainly to department stores, chargebacks go hand-in-hand with corporate life. The bigger the vendor, the larger the orders and consequently the greater the headaches.

"Chargebacks haven't worsened, but it is a significant part of business. It has [in fact] become a part of how we do business," said Hal Upbin, former chairman of Kellwood Inc.

Apparel firms targeting a well-heeled clientele seem to be better insulated from the world of chargebacks.

"Thank goodness we're in the luxury business," observed Graziano de Boni, president and ceo of Valentino Inc. "Our [goods] sell because they are what our customers want, not what the retailer is pushing down to the customer. That's where the chargeback comes from."

De Boni was referring to situations where department stores order voluminous units and then have to deal with the logistics of delivery and inventory control at the mass level. In the luxury sphere, orders even by the department stores are much smaller in scope, making them far easier to track.

And while luxury is less susceptible to a chargeback attack, the younger firms still in their infancy that sell to department stores hoping to grow may face the thinnest profit margin of all.

"I appreciate the support of Federated Department Stores, but [would also] appreciate less chargebacks," said Damon Dash, the hip-hop mogul who sold his 25 percent stake in Rocawear in September, and who is now focused on contemporary line Rachel Roy, the men's wear line Damon Dash Collection and the athletic apparel collection Team Roc.Dash said the problem with some retailers is that they're "not amenable to negotiation, and that hurts your business plan."

He does have a solution: "I want to open stand-alone stores."

For now, some manufacturers are pushing forward with a plan to help level the playing field in the retailer/vendor relationship. The Vendors Coalition for Equitable Retailer Practices was formed in the fall.

"Its goal is to establish fairness for both sides. Some chargebacks are proper and appropriate when the goods are nonconforming," said Donald Kreindler, an attorney at the Phillips Nizer law firm involved in the spearheading of VCERP.

The coalition is in the process of conducting its own survey from a questionnaire it began sending out in October on chargeback practices, which is broken down in part into sections by retailer, sector and category.

Last month, members of VCERP had a meeting to discuss the development of position papers, the first of which it hopes to have available early in the new year.

Among the topics being discussed is the issue of when an order given by a retailer should be considered a firm purchase.

"The problem is that some retailers give orders, but practice not sending out firm purchase orders until it's very late. Most give an oral order with a delivery schedule that needs to be worked on right away to fulfill the order. Then, after some goods are produced, the retailer cancels, even though the vendor has already put its own money into the production," Kreindler said.

Another topic is claimed shortages. The attorney noted the problem comes up frequently. A recurring problem, he explained, is when retailers claim shortages or other nonconformity after the goods are no longer available, which prevents the vendor from checking out the problem or proving that there was indeed conformity after all.

Kreindler emphasized that not all retailers are alike in their practices, although he also declined to specify which ones are better than their competitors.

"Among certain retailers, there is an awareness of the imbalances that can exist and some are easing their positions, but not all retailers are doing that," he said.- With contributions from Nathan Weber and Steve Justice

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