PEAK STILL AHEAD IN CHARGEBACK CYCLE
Byline: Vicki M. Young
NEW YORK — It might be the season of goodwill, but that doesn’t apply to the relationship between vendors and retailers.
Margin pressures on retailers are heating up and that is threatening to scorch their suppliers’ profits. The holiday 2001 season will be remembered as a quarrelsome time as retailers got tougher on up-front negotiated deals while vendors griped about the neverending drive by their customers for liberal allowances, earlier markdowns and more expensive chargebacks.
Some vendors say that retailers have become more creative in finding ways to nickel-and-dime suppliers. Wal-Mart implied in an earnings conference call last month that it was looking for more financing support from its vendors. The world’s largest retailer said it eventually wanted to move to a point where 100 percent of its inventory was financed by its suppliers.
Just how bad is the margin-support practice? On Oct. 31, in a lawsuit filed in a New York state court in Manhattan, Federated Department Stores was charged with “assessing bogus chargebacks as a means of effecting price discrimination” and threatening to withhold shelf space for future product lines to “coerce” the manufacturer into “acquiescing to these chargebacks.”
The suit was filed by Herbert Feinberg on behalf of IA Alliance Inc., a sleepwear and robe manufacturer previously known as I. Appel Corp. The lawsuit further charged that individuals from Federated’s accounts payable department “acknowledged that the chargebacks were assessed simply because Federated’s revenues for a particular quarter were not as high as desired and there was a determination that payment should not be made in order to improve Federated’s bottom line.”
Feinberg, who said in the lawsuit that the practice has driven numerous vendors — including IA Alliance — into bankruptcy, is trying to recover at least $100,000 for allegedly improper chargeback assessments from 1995, $250,000 for violating New York’s general business law for deceptive acts and practices and unspecified compensatory and punitive damages.
Feinberg’s counsel, Steven G. Storch of Storch Amini & Munves, said that Federated is expected to file its answer this week. A spokeswoman for Federated declined specific comment on the lawsuit because of the pending litigation. As for the retailer’s policy on chargebacks, she said that the company’s vendor manual has been in place for years, that vendors are aware of those policies and that the policies are consistent with “what we do with chargebacks.”
To be sure, manufacturers have been grousing for years about the enforced practice of “givebacks” even after they’ve supposedly “sold” their goods to retailers with confirmed terms. However, vendors say the lackluster economic environment has added financial fuel to the fire: retailers are forcing them to help in meeting gross margins, leaving vendors worried about diminishing gross profits. The practice is by no means new, but it’s been particularly onerous as the retail climate has deteriorated.
Hamilton McDermott, vice president at consulting firm Emanuel Weintraub & Associates, said: “Retailers are applying more pressure, asking for larger markdowns and allowances up front. Even after the prenegotiated amounts, if things don’t happen as planned, in terms of margin goals, retailers will come back for more later. They are also asking for more support even after the goods are shipped.”
Hal J. Upbin, chairman, president and chief executive officer of Kellwood Corp., said that because of the intense promotions at retail, he knows Kellwood will have to fork over a much higher rate of margin support than usual at the end of January, when retailers typically go calling for postholiday markdown money. Pressure from retailers for chargebacks was one reason Kellwood gave last week for its 48 percent decline in third quarter profits.
Robert Drbul, apparel analyst at Lehman Bros., said: “The firms with the broadest range of estimates, Tommy Hilfiger and Polo Ralph Lauren, are leaving themselves with some additional flexibility, in terms of markdown money.”
Joel Horowitz, chief executive officer at Tommy Hilfiger, said: “Chargebacks have gotten out of hand. It’s the most distasteful part of the business.” According to the ceo, though it is an issue, it is not a big one for the firm.
Christine Kilton Augustine, retail and apparel analyst at ABN AMRO, said: “Probably the most glaring example is Jones Apparel Group. The company’s charge in the third quarter was $86.7 million, with $24.1 million of that for additional markdown money and $62.6 million for the liquidation of inventory. It is going to be just brutal for manufacturers as many retailers are now really adhering to their shipping windows, with no exceptions.”
The chargeback pressure has escalated without any corresponding drop in the search for other types of vendor support, such as cooperative advertising assistance and discounts for a specified period on merchandise for new stores.
Even the big players, who have better negotiating power with their retail customers, are planning for big hits.
Alan M. Melamed, president of credit reporting firm Alan M. Associates, said: “I can’t remember the last time I heard anything encouraging from a vendor. Their expectations for the season are very low. The impact of Sept. 11 is that big discounts are being applied at an earlier date, in order to move inventories. Markdowns and chargebacks are also occurring earlier in the season.”
According to Melamed, a vendor last month was hit with a chargeback for one very large carton of merchandise returned by a department store: “The chargeback was for $10,000. After the box was opened, the company found items that were used and returned. Some of the items weren’t even manufactured by the vendor. The executives are pondering whether they should take a stand with the retailer, but the sales department is telling them to just give the credit and get on with the season.”
Experts advising companies on their chargeback problems speak of three categories of the practice: intentional, preventable and unauthorized.
Jessica Butler, the partner in charge of the Chargeback Initiative of Grant Thornton, said: “The intentional chargebacks — guaranteed margins, discounts, allowances and rebates — are really the costs of doing business. Retailers negotiate them up front. The unauthorized charges, such as shortages, are more difficult for vendors to prove.”
Dave Baker, executive vice president of operations and logistics at Saks Inc., said: “Historically, it has been difficult to gain consistent vendor compliance for simple shipping and industry standard floor-ready requirements. Expense offset fees are intended to gain the vendor’s attention and seek resolution.”
Baker pointed out that, in his experience, most vendors want to comply but either don’t understand the process or don’t have systems enhancements in place yet. He noted: “The number of expense offset fees has dropped dramatically. What is left can be divided into vendors who knowingly will not comply with EDI [electronic data interchange] and freight issues and vendors who comply for certain issues and not others. We are ready to help any vendor who is attempting to comply, but we are not left with many options for the vendors who make little or no effort to work with us and other retailers.”
According to Baker, common vendor violations include merchandise shipped too early, too late or to the wrong distribution center.
A spokesman for Kmart said that the retailer has reduced its rules to just three from 92 shipping requirements. “Number one is the advance shipping notices from vendors, the second is on-time delivery within 3 days of when a vendor says the goods are going to be there and last is having the right UPC [universal product code], or bar code label. If any one of these three are not met, there’s a vendor compliance fee,” the spokesman said.
Suppliers accept that chargebacks are a part of doing business and even acknowledge that some are justified, but they appear increasingly outraged about how unreasonable and absurd those charges can be.
Stuart Bender, chief operating officer of Happy Kids, a diversified children’s apparel import firm, explained: “If there are 12 items and one has the wrong price ticket, I get a chargeback for a short shipment, the wrong price ticket and for substitution [of a unit]. The chargeback exceeds the cost of the goods. It’s one wrong item, but I’ll get charged for the same item at least three different ways by three different departments. How many times should I get charged for the same thing?”
Retailers told WWD that each violation can have multiple negative effects, resulting in the different charges.
Butler pointed out that many retailers really don’t like dealing with chargebacks, even though vendors contend that the practice has become a profit center for stores. “Most retailers,” she said, “just want to get the goods into the door and have them floor-ready.”
Kim Zablocky, head of Cyberbusinesscredit, observed: “The biggest problem for manufacturers is that you could have 10 retailers and they all want you to ship in 10 different ways.” He explained that retailers want to handle the product as little as possible so they can quickly turn the inventory. “Everytime they touch the product means delays in getting it to the sales floor, which costs them money,” he said.
The news isn’t getting any better.
Tom Schoewe, chief financial officer at Wal-Mart, told Wall Street analysts last month that the chain is planning to reduce up-front investment in inventory. Payables for the overall company, as a percentage of inventory, have risen to about 65 percent, but the firm’s target is to have 100 percent of its inventory financed by its suppliers. The cfo said the plan entails quicker turns on inventory so the goods are sold before the bills for the orders are paid.
Financial advisers said achieving that goal means extending the time on payment. The fear is that the practice could lead other competitors to extend their terms of payment as well. At least one competitor, according to vendors and credit analysts, already has delayed its payments by an additional 45 days to those suppliers not on its “A” list.