CHARGEBACK UPDATE: THE PAIN EASES

Byline: Thomas J. Ryan

NEW YORK — Could it be true?
The grousing over chargebacks, the one topic guaranteed in the past to trigger angry expletives from almost any apparel vendor, appears to be softening.
It’s not a unanimous appraisal, to be sure, but at least that’s the story from a cross section of executives, who say they are seeing more fairness from retailers in levying these charges when merchandise is not shipped according to specifications. At the same time, some say the calls for markdown money have diminished, as vendors have taken more control of their destiny on the selling floor and better shipping practices cut back on the need for markdowns.
“Maybe retailers realized that relations have been strained and they want to do a little better,” said George Horowitz, chief executive officer, chairman and president at Active Apparel Group. “I don’t know if I could have said that a couple of years ago, but coming up with false chargebacks is not acceptable in a partnership and can’t be done anymore. The integrity issue is becoming important to everyone right now.”
“We get hit with some chargebacks that we deserve, but by and large, our relationship with our customers are fair,” said Stuart Levy, chief financial officer and secretary at Bernard Chaus. “They’ve been very receptive to giving us exemptions as we were getting our processes in place. We certainly have upgraded our computer systems and distribution center to comply, but it’s also given us a more efficient overall operation. At this point, we have no major problem.”
Stuart Brister, head of factoring at Banc of America Commercial Finance, has a similar view, noting he believes the situation is better than in the Seventies and Eighties, when rumors of kickbacks mingled with the wailing over chargebacks.
“There were a lot of underhanded buyers doing a lot of underhanded things, but now there are so few retailers left that there seems to be a lot more conformity in their relationships with suppliers,” he said.
Still, Brister pointed out — as many others quickly do as well — that when it comes to chargebacks, retailers clearly have clout and often use it.
“He with all the gold makes the rules, and right now, the retailers have all the gold. There are so few retailers to sell that [the vendors] have to tolerate it,” he said.
But according to retailers, vendors are not only tolerating the situation when it comes to logistical chargebacks, they’re learning to be better vendors because of them.
Dave Baker, executive vice president of operations and logistics at Saks Inc., said that vendors historically downplayed logistics to focus on sales and marketing. But he said, “Once we started charging for the extra expense caused by vendor supply chain errors, it got the vendor’s attention and allowed the issues to be worked out in a proactive manner. We are looking for compliance, not revenue.”
Baker said Saks works with smaller vendors to help them reach compliance and often provides exemptions while they are learning.
“We’ve had many vendors upon reaching compliance come back to thank us for helping them through this process because they’ve become more efficient with their own supply chain network,” Baker said. “And many vendors are pushing the process back to their point of manufacture, thus making the entire pipeline more efficient.”
Tom Cole, chairman and ceo of Federated Logistics and Operations at Federated Department Stores, pointed out that 90 percent of the retailer’s vendors are meeting logistical specifications when shipping merchandise. The handling of chargebacks is “a very small portion of our expenses , and it’s going down every year.”
“Our intention is to get the right behavior and not the expense offsets,” he said.
Proper compliance, Cole added, significantly improves inventory flow.” It cuts down the times the merchandise is touched, which is good for everybody,” Cole said. “And the vendors get paid quicker and more accurately, so it’s in the vendor’s best interest to do that.”
Still, there’s no doubt that chargebacks remain a source of irritation for many in the apparel industry, and retailers as well acknowledge that.
Gus Pagonis, executive vice president of logistics at Sears Roebuck, lamented that the constant haggling over drop dates and the size of fines creates a feisty relationship.
“No vendor is going to be thrilled that they’re being charged for noncompliance,” Pagonis said. “They’d rather ship when and how they want. And we’d rather have no chargebacks in the compliance area. So there’s a built-in animosity we have to work around on both sides.”
Furthermore, he indicated, only meaningful penalties compel the vendor to make corrections.
“If it’s not high enough, the cost can be buried in cost of goods sold and they won’t try to fix it. But if it’s too high, it hurts them,” Pagonis said. “So it’s a fine line, and we’re doing the best we can. I think they agree that we’re honest. We have high integrity.”
From the vendor side, Gregg I. Marks, president, Kasper ASL Ltd., said, “We’re trying to work very closely with stores to accommodate what they want, which in most cases is to give them product floor-ready. The problem is when you make a little mistake and they bang you with a big chargeback. It doesn’t make for very healthy relations.”
Also, there’s a natural grudge since the vendor in most cases needs the retailer more than the retailer needs the vendor. “As a manufacturer, I’d like to start charging the store when they give a confirmation late, or the store breaks down orders late,” Marks said.
But he concurred the goal of improving sell-throughs is commendable. “There’s nothing worse than wasting two weeks trying to get the product to the selling floor,” Marks said.
When it comes to markdown allowances, some vendors have been able to lessen that burden by taking greater charge of what happens to their merchandise on the selling floor. They’ve improved sell-throughs by building in-store shops, hiring sales specialists, training retail personnel, shipping more frequently and even pulling inventory from the retailer’s stock room. Technology is being used to monitor stocks and sell-throughs by door.
Several major suppliers now have merchandise coordinators, a position initiated by Liz Claiborne in the mid-Eighties, pointed out Josie Esquivel, an analyst at Morgan Stanley.
Jones Apparel Group, she further noted, has 1,600 sales people strictly selling Jones New York and Lauren Ralph Lauren apparel in stores. The sales force is hired by the department stores, interviewed by Jones’s merchandise coordinators and given a $3,000 clothing allowance by Jones.
Marks also said that Kasper has prospered by partnering with the retailer at the store level and analyzing sell-throughs by the door. Kasper, the firm’s annual report also related, has about 165 selling specialists at the highest volume Kasper in-store boutiques that provide weekly reports on sales and inventory positions. Although these selling specialists are store employees, they are trained by Kasper and can earn Kasper suits as incentive bonuses for above-average performance and by providing feedback via monthly reports to regional manager.
Retailers, for their part, see markdown allowances as part of the partnership mode with vendors. “If a vendor is not maintaining at least an average or better margin than his department, he has to do something in order to stay in that department,” said Joseph Levy, chairman at Gottschalks, California department store chain. “We advertise it, promote it, buy it in depth and stock it. And once in a while, if they have a bad season, you just don’t walk, you give them another chance. We have to take care of our shopper, and in turn, the vendor has to take care of their customer, this department store that they’ve been doing business with for a long time.”
Said Michael Gleim, vice chairman and chief operating officer at Bon-Ton Stores: “We do not ask them to indemnify us for markdowns. We’re asking to be business partners.”
“Most vendors support those initiatives with us,” said Gleim about margin guarantee arrangements. “We’re sharing profitability and we’re sharing risk. We want our supplier to be strong because we’re only as strong as they are.”
He estimated that only between 10 and 15 percent of the markdowns taken by Bon Ton during the year is supported by vendor chargebacks. “The rest I bear myself,” he said.
And many vendors seem to agree that sharing markdown risk is a fact of fashion life.
“We have markdown agreements with all our major accounts,” said Bob Gray, chairman and ceo at St. John Knits. “It’s the way I’ve been doing business for 15 to 20 years. I’ve always felt the retailer was our partner.”

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