CHARGEBACK DEBATE ROARS ON, AS PRACTICE REMAINS FACT OF LIFE
Byline: Thomas Ryan
NEW YORK — Vendors, save your tears. Retailers’ chargebacks aren’t going away.
That was the sober message emerging from a WWD roundtable discussion held last week on the topic, a discussion that covered merchandising chargebacks — retailers’ requests for vendors to cover last seasons’ markdowns or co-op advertising — and administrative chargebacks, the fines or assessments against vendors for shipping mistakes.
Among the points made:
Many vendors, even top ones, sometimes pay chargebacks for goods that are marked down on the selling floor;
Vendors generally are paying larger amounts than in the past for co-op advertising;
More vendors are providing their own sales associates in department stores, another form of chargeback.
Some vendors guarantee margins, and consequently get hit with a chargeback if markdowns cause ticket prices to slide below that margin;
Some vendors often operate in department stores at a loss or at a marginal profit because of chargebacks, but continue to do business there largely to maintain volume and add brand support.
The topic is a hot one, and the discussion, covering retailer and vendor views, sometimes reflected that heat, but the tone remained civilized, for the most part.
Meeting at WWD’s offices here were:
Tom Cole, chairman and chief executive officer of Federated Logistics and Operations, a division of Federated Department Stores.
Bud Konheim, ceo of women’s apparel firm Nicole Miller.
Allan Ellinger, partner at the consulting firm Marketing Management Group.
Bob Moss, regional manager at Creditex Corp., a chargebacks recovery firm.
Harvey Gross, vice president at Nationsbanc Commercial Corp. and chairman of the New York Institute of Credit.
Many vendors contend that since retailers have become larger through consolidations, they are using that extra clout to force chargebacks on suppliers. On the other side, the stores assert that they are forced to request that vendors take more responsibility for markdowns, advertising and even selling floor help to maintain margins in an intensely competitive retail climate.
“We’re not shy about asking for support from the vendor community, and I don’t see that changing,” said Cole.
“Retailing is a complicated and competitive business, and I guess in today’s world the price negotiation is never finished. I think that’s the reality.”
Cole underscored that many vendors are thriving despite chargebacks.
“The fact of the matter is, our business evolves and there are resources out there who are doing extremely well and are making a lot of money in partnership with us,” Cole said. “We’re going to try to continue to support those people and hopefully find more.”
Other roundtable participants were not completely in sync with Cole’s assessments.
Ellinger said he believes chargebacks are “destroying” the vendor community, and the handling of chargebacks is rife with abuses.
“Retailers’ reputations were built on being great merchants, but now it has nothing to do with merchandise anymore. It has to do with numbers and how much can I screw the vendor,” Ellinger said.
Ellinger said he believes many retailers treat chargebacks as a profit center, noting one senior executive at a large department store chain, which he did not name, was given a mandate last December to collect $50 million in chargebacks.
“I think the problem is that a lot of manufacturers don’t feel as if they’re being told the truth,” Ellinger said.
“They feel that chargebacks have gotten usurious and onerous, and that it’s a one-sided battle because it’s very hard to get back money once it’s been deducted.”
Nationsbanc’s Gross said chargebacks have created an acrimonious relationship between vendors and retailers.
“There’s a strong feeling out there among vendors that you’re going to get it, one way or another,” Gross said.
Creditex’s Moss added that the chargeback request seems particularly to favor larger suppliers.
“The major vendors have some leverage themselves, but most of the companies are medium-size companies that are looking to survive, and the amount of chargebacks becomes so cost prohibitive, it makes it almost impossible for them to do business,” said Moss.
Nonetheless, Cole said it is necessary to ask vendors for chargebacks because the hyper sales climate continues to erode margins at department stores.
“It’s a competitive world we live in, and we’re trying to make as much margin as we can. We’re reacting to what our customers want of products, and we’re going to try to get the best price we can,” Cole said.
Nicole Miller’s Konheim concurred, while arguing that chargebacks primarily resulted from a change in nature of the department store business, which is now squarely focused on price.
“Right now shoppers don’t come to see beautiful merchandise with great big assortments. The appeal of the department store right now is that the store’s on sale, and every store, even Saks, now runs their business with a sale,” Konheim said. “So it’s not about chargebacks, but about the competition between each other and it’s about lower prices.”
“We would love to sell less promotional, but customers want sales,” Cole said.
Cole added that during the past holiday season, Federated did not add any additional promotions and consequently had a “weak holiday” compared with the volume of some of its major competitors.
“We did that purposefully, but we look back at that now and some people consider that a mistake. But we didn’t want to have to compete with more sales events next year. It’s a big challenge for the industry,” Cole said.
Cole said only about 5 percent of Federated’s chargebacks are administrative, representing problems shipping goods to stores. Vendors have largely eliminated these type of chargebacks as they have upgraded their back-room technology, he said.
The remaining 95 percent of Federated’s chargebacks are merchandise-related.
Cole said these merchandise-related chargebacks stem from “good old-fashioned negotiations” between “hundreds of buyers and thousands of vendors,” and most vendors agree to share markdowns.
“It’s a very complex situation and we believe it works,” Cole said.
Cole speculated that chargebacks could run from zero to 5 percent of sales for a vendor, but he said many vendors perceive the situation as a partnership.
He also pointed out that a large chunk of these chargebacks relate to co-op advertising and support for demo sales associates that vendors see as direct support to their brand on the selling floor.
“I think as vendors have wanted to be a bigger part of the store, this is where they’ve seen a way to get more items on the floor. So whether it’s right, wrong or indifferent, that’s the way it’s evolved and that’s what we deal with today,” Cole said.
The irony of the chargeback phenomenon, according to Konheim, is that vendors “brought it on themselves” by selling to off-pricers such as Loehmann’s and others in the Fifties in a aggressive attempt to build volume.
“The department stores wanted to have exclusive stuff so they could be the best store in the town, but pretty soon they got watered down by all the discount stores,” Konheim said. “The manufacturer said the discounters were different shoppers, but it’s the same shopper going all over the place and that forced all prices down. So the department stores said, ‘Give me some discounts,’ and that’s where it started.”
Konheim said department stores shifted from being “great merchants to deal makers,” and the business became more of a numbers game.
The situation only was exacerbated with the rise of discount giants such as Target and Wal-Mart and outlet malls, he added.
Konheim said his complaint is that he wished department stores would be “up front” about the pricing structure when the deal is made. He said he would prefer the option to reduce a price at the start of the sales process rather than get hit with a chargeback months after the product has hit the selling floor.
Konheim said that’s why Nicole Miller has focused on specialty stores, which he said have substantially higher margins and substantially lower return rates.
However, while specialty stores don’t have chargebacks, “it’s not that easy either,” since it’s arduous dealing with “many little accounts” and it often takes longer to get paid.
Miller said he serves a limited amount of units at major department stores “because it’s nice to be there” for selling space reasons, and because every once in a while a hot item pays off.
Ellinger said the administrative chargebacks have been around for a long time, although the demands by retailers for proper invoices and correct routing have become more burdensome.
The merchandising and co-op advertising chargebacks, according to Ellinger, accelerated in the Seventies and Eighties when stores started coming back and asking for markdown allowances in order to bolster operating numbers.
“The stores were coming in, saying, ‘We want it to be a partnership,’ but the problem is they wouldn’t share on the upside,” said Ellinger. “They wanted us to bolster their margins, but if the product outperformed what they budgeted, we never saw an upside.”
“It was a one-way partnership that kind of didn’t hold water, and today it’s gotten to be a cancer,” Ellinger added.
Cole concurred that there is a feeling among some vendors that retailers have a leg up in chargeback negotiations, but he said Federated has high standards.
Cole said if a chargeback error has been made, “we’ll pay it back as fast as we know about it.”
However, he said most vendor complaints involve administrative or logistical chargebacks.
The larger merchandise-related chargebacks are rarely contested, and infrequently are levied in error, Cole said.
“We just don’t charge people back because they did not make their gross margin. It’s part of the negotiation, and we have many vendors that are willing to make those agreements,” Cole said.
“We care a great deal about vendor profitability, because if our vendors are not successful, then we can’t be successful,” Cole said. “Over 80 percent of our business is branded goods, and if our major brands do poorly, it would be difficult for us to overcome that,” Cole said.
Ellinger said many vendors are intimidated by retailers into not fighting chargebacks.
“Most manufacturers are afraid they’re going to alienate somebody and lose an order,” Ellinger said. “They don’t know what the future will be if they are accused of trying to change the trend.”
“I think to a great extent that we’re going to see more manufacturers going by the wayside because they can’t make ends meet and they can’t maintain margins,” Ellinger added.
Creditex’s Moss said chargebacks have become an “astronomical profit center for the retailer,” noting Creditex has been able “to negotiate a tremendous amount of recoveries and that would seem to suggest that maybe the money shouldn’t have been deducted to begin with.”
The aggressive retail stance is forcing vendors to take a “very proactive approach” to fighting chargebacks, according to Moss.
“Vendors need to react to a chargeback very quickly. They can outsource, if that’s what’s needed, or beef up the back room personnel. But I think at the end of the day, there’s a lot of money to be recovered.”
Konheim said he suspected that a department store buyer would prefer to work with a large vendor that has proven ready to come back with a chargeback rather than a smaller vendor that might have a potentially hotter line.
“In the end, the guys that are able to live with the chargebacks and negotiate things are the guys that have critical mass of three to six hundred million [in sales] and are the giant suppliers. The big complaint is the homogeneous [merchandise] at department stores, and it’s going to continue.”
Ellinger observed that smaller firms are particularly hard pressed to weather chargebacks, and this hurts the department stores’ chances of “putting a new perspective on fashion and giving the store an individualistic appearance.”
Cole admitted, “It’s difficult to make a small vendor important in a short period of time,” but he noted Federated has programs designated to find small vendors that can make a difference in Federated’s assortment.
Ellinger said some vendors have attempted to bond together in a united front against chargebacks, but said many are afraid retailers would drop orders if the vendors participated in such a group. Some vendors have called for an outside party to regulate chargebacks; some even want government intervention.
“One of the worst things this industry could do is to ask somebody outside the industry to get involved,” said Cole. “To me, that would be unconscionable to want a third party to come in and help us settle our issues.”
Cole also stressed that many vendors are excelling in the current department store buying setup, and he noted the department store industry in general is much stronger financially after being written off as extinct in the late Eighties.
“So something’s working,” Cole said. “It’s hard; it’s tough; nothing’s easy. Vendors fall out and department stores fail, but the fact of the matter is, it’s still a pretty good business. And since 80 percent of what we do comes from our vendor community, they must be doing something right. I think as a package, we’re doing pretty well.”