Vendors Crack Down on Chargebacks

NEW YORK — Vendors, forever griping about retail chargebacks, just might be putting some actions behind their words.

Some vendors are putting their feet down and actually saying no to retailers attempting to scorch their profits with chargebacks, markdown money and other allowances.

While vendor indignation about the subject has been long-standing and growing, difficult conditions in the marketplace in recent months appear to have taken it to a new level.

Paul Charron, chairman and chief executive officer of Liz Claiborne Inc., said earlier this month in a second-quarter earnings conference call, "All the weak players are out of money, and the idea that people will give and give and give in terms of markdowns — that idea is outmoded, inappropriate and it [isn’t] going to happen. You can no longer stack it high, sell it cheap and go to the vendor and expect that the vendor is going to pay you."

Escalating what has generally been a battle of words, Components by John McCoy Inc., a men’s tailored clothing firm, last month filed a lawsuit against Federated Department Stores over the issue of chargebacks in a New York State Court in Manhattan.

As reported, Federated also was sued last Oct. 31 by Herbert Feinberg on behalf of IA Alliance Inc., a sleepwear and robe manufacturer previously known as I. Appel Corp. The lawsuit, also filed in a Manhattan state court, charged Federated with "assessing bogus chargebacks as a means of effecting price discrimination." Feinberg said in court papers that the practice has driven numerous vendors, including IA Alliance, into bankruptcy. He was trying to recover $100,000 for allegedly improper chargeback assessments from 1995.

The legal route that McCoy and Feinberg chose is one that many firms say they want to take, but most, fearing that stores will replenish their stocks elsewhere, wind up with cold feet. In the case of Feinberg, he didn’t file until after his firm went belly-up. Even if suppliers who contest every deduction know that they’ll eventually get the credit, often the tortuous process can at the very least contribute to a firm’s growing pains.

"Generally I can get the charges reversed, but it can take four or five months for the reversal," McCoy said. "That time delay costs me money. I might be told about the reversal at the end of the month, but the check won’t be cut until the middle of the following month. The retailer in the meantime has use of my firm’s money. This is a form of self-financing for the retailers."In a letter from McCoy’s attorney Barton Nachamie of Todtman, Nachamie, Spizz & Johns to Federated on Feb. 6, the manufacturer was seeking payment of $37,002 as the amount owed by the retailer in connection with two incidents of allegedly "improper chargebacks." When McCoy failed to get anywhere on his claims for the amount owed, his firm filed its suit.

According to the legal papers, the first instance of impropriety involved the retailer’s request for authorization to return 231 apparel items that it had previously ordered. Federated, the lawsuit said, only sent back 159 garments, yet took a credit for the full 231 garments. In failing to pay for 72 items, Federated "breached its contract with Components, damaging the manufacturer in the amount of $13,544."

The second dispute between the parties centered on Federated, without authorization, sending items back to the vendor that it had ordered. "Because the garments are no longer in season, Components is unable to resell them," McCoy said. That particular action could cost Federated $10,302, assuming McCoy succeeds on his claim.

A third dispute involved the alleged nonpayment by Federated for an order for "36 garments." The amount allegedly owed on the order is $12,156.

Federated, represented by the law firm of Morgan, Brown & Joy, filed an answer in court earlier this month that denied the allegations in McCoy’s lawsuit. Among the 16 affirmative defenses included in the answer, Federated said that it has "paid in full" any amounts owed to the vendor and that all the deductions or chargebacks applied by Federated were properly authorized.

In its defense, Federated claimed the vendor failed to "state a claim upon which relief may be granted;" that the claims are either barred or should be reduced by the manufacturer’s failure to mitigate damages; that the supplier failed to "name the proper party defendant" in the action, asserting that that defendant should not be Federated, and that the manufacturer "misrepresented the nature of the goods sold."

A spokeswoman for Federated declined comment on the two lawsuits and the chargeback issue because of the pending litigations. McCoy’s suit, recently filed, is in the very early stages of litigation. Feinberg’s suit is still in the discovery, or evidence gathering stage.To be sure, the statistics suggest that givebacks have started to trend in vendors’ favor since the Sept. 11 terrorist attacks on U.S. soil.

According to Jessica Butler, the partner in charge of the Chargeback Initiative program at the accounting firm Grant Thornton, a survey of chargeback practices indicate that 55 percent of those questioned said the givebacks were on the rise in 2001. However, speaking at a Vendor Compliance Federation meeting in February, she said that, of those surveyed, only 37 percent said that they thought there was an increase following Sept. 11.

Butler also noted that since the attacks, the top three areas where deductions increased were margin support, advertising allowances, and compliance issues. Those surveyed also said that they observed increases in the different distribution channels. Forty-one percent of the respondents reported an increase in the department store channel, the same percentage who also said that they observed an increase among the discount store chains. In contrast, nine percent said that national chains had increased their deduction requests, while only six percent said there was any increase among the specialty stores. Of those surveyed, 3 percent said they weren’t sure what the increases were by distribution channel.

Vendors right now are entering the period when retailers make their quarterly demands for chargebacks and markdown money. "The good news is that so far there doesn’t seem to be a lot of surprises," noted Carol Lapidus, an accountant and managing director at American Express Tax & Business Services, who surveyed her clients a week ago to check on general industry trends.

According to Lapidus, companies were better prepared to track and fill orders this year. The communication between vendors and retailers showed signs of improvement and inventory levels were leaner, with less merchandise available that would be subject to givebacks, she noted.

Cynthia Cohen of Strategic Mindshare observed two other reasons for the improved situation: "The softening of the economy has led to the retailer taking the responsibility for doing a better job of flowing inventory to the stores. In addition there has been an improvement in the technological systems on the part of both the retailers and the manufacturers."

So, is a sea change in the works? Retail pressures might be easing a little bit, but not necessarily by that much.Jeffrey Kapelman, secretary and treasurer at factoring firm Hilldun Corp., observed, "There has been, qualitatively, a little improvement because retailers are managing their inventory better. It is not a substantial improvement. The problems come on the retail side when they can’t sell the merchandise they’ve ordered. When the inventory is better controlled, it makes for better business for both sides. Goods that are sold aren’t marked down, and, when retailers order more, chances are they will pay for it."

Victor Wahba, partner in the apparel and textile services group at the accounting firm M.R. Weiser & Co., said, "The chargeback climate has gotten better for my clients. Vendors who have invested in their technology, and communications platforms are doing better. They are bringing the controllable chargebacks such as shipping violations down sharply. The uncontrollable chargebacks that we hear so much grumbling about you will likely continue to hear more of from vendors whose product fails to perform at retail."

Wahba doesn’t believe that retailers will ever "give up their trick of getting concessions from vendors for products that don’t perform well. Vendors will always share in retailers’ pain, but rarely will they share in retailers’ profits."

According to Wahba, manufacturers who invest in the right information-technology platforms have a better shot at meeting retail demands through a quicker read on what consumers want, resulting in an improved ability to get the right merchandise onto the sales floor sooner.

Stanley Officina, president of Sterling Factors, argued, "Retailers are now loathe to give up what effectively has become a profit center for them. Whether the inventory levels are down or go sideways, it won’t matter because that deduction for something will still be there."

As for the legal skirmishes, an executive at a finance firm on Seventh Avenue doesn’t think that one lawsuit here or there would make any difference.

"What you probably need for any impact is to have a class action, or a consolidation of all the suits to put a stop to the practice. I don’t believe you’ll ever see that happening with the individual vendors that comprise the bulk of our industry, those with annual volume between $5 million to $20 million. Then you have the top-tier firms such as the Liz Claibornes, Polo Ralph Laurens and Tommy Hilfigers. They represent huge dollars volumewise, but there aren’t that many of them. These top firms will be the ones to lead the way and will probably reap the rewards, while the little independent manufacturers will be left at the mercy of the customer," the financier said.Chargebacks may be a big issue for vendors, but they’re only one of many sources of income that are often claimed by retailers. Kmart, for example, got nailed earlier this year when it had to restate certain quarterly numbers because of how it accounted for volume rebates on its balance sheet. Volume rebates tend to apply mainly to non-apparel items such as food and detergent.

While retailers pay for goods shipped, much of that heads back to them in the form of various allowances, whether for the cost of catalogs and in-store promotion or the vendor’s contribution to the costs of opening new stores. Those allowances are frequently controllable because they can be negotiated up front, giving the vendor at least a baseline expectation of how much it has to contribute to a retailer’s expense structure.

What has been the headache for suppliers are those uncontrollable charges or allowances that occur at the end of every season. Sometimes, vendors say, they get hit with a charge several quarters after the order had already been shipped. Record-keeping and the tracking of old orders and shipping documentation become nearly full-time chores.

Mark Bienstock, executive vice president at DCD Capital, a factoring firm, suggests that firms pay their bookkeepers a partial commission, thereby giving them an incentive to carefully review documents to ensure that accounts receivable are collected and retained.

Bienstock said that vendors have to build various charges and allowances into their costs of doing business. "Whatever term you give it, this is what it costs to do business with a particular retailer. If a manufacturer chooses not to, its management has to understand that there are 500 other companies willing to step up to the plate and take its place as the retailer’s supplier," he said.