Sucker-punched by deductions

Don Hogsett, October 12, 2001

Are retailers going too far?
New York — Already reeling from losses, debt loads and low-cost imports, the American textiles industry is now being sucker-punched by a combination of retail chargebacks, extra costs and unauthorized deductions that is leeching out what little free cash many key players have left.

For decades, chargebacks have been an expected, and negotiated, bane of the business, with vendors asked to share the pain with retailers, paying part of the costs of advertising, paying slotting fees for new programs, new store stocking fees and other anticipated costs. Canny suppliers, accustomed to a practice they find distasteful — if not verging on extortion — have simply added up the costs and built it into the price of the product.

But now, increasingly crying foul, suppliers say they're being bludgeoned with a steadily increasing barrage of unauthorized, unexpected charges and compliance fines that's whittling profits down to the vanishing point.

Just how bad has the problem become? In an exclusive Home Textiles Today poll, suppliers said that for an order valued at $100,000, they now expect retailers to deduct almost 10 percent of the price in the form of chargebacks and deductions — a mean amount of $9,105.

And if it's almost 10 percent of the sale, they said, it's more than a fourth of the profit they might have expected to see on the order, a mean amount of 28 percent.

In fairness to retailers, most of the chargebacks and deductions are negotiated in advance and don't affect a supplier's profitability. It's the ones that haven't been authorized that are starting to take a toll on many hard-pressed suppliers.

The litany of complaints goes on and on, say vendors: an hour too early, an hour too late; a label in the wrong place; half a dozen units too short; a buy back requirement for the products you want to replace on a store's shelves; a fee that helps someone else build a new distribution center, even if it's one of the nation's most immensely profitable retail operations.

Especially threatening, say vendors, is that a system they believe has become abusive is now becoming institutionalized, with retailers routinely using unauthorized chargebacks and deductions as a profit center. Often, say suppliers, problems are ultimately resolved, but only months later, after intense, prolonged and draining negotiations — after all, who wants to antagonize a customer that may account for more than 10 percent of a company's total sales.

And in the meantime, while a vendor is awaiting a resolution to a disputed chargeback or penalty, its cash is being tied up. The net effect, say suppliers: they're being used by retailers, in many cases, as zero-interest lenders, bolstering a retailer's bottom line, while jeapordizing their own profitability.

Chargebacks and unauthorized deductions are a problem hardly unique to the home textiles business — it's pervasive throughout the entire supply chain that keeps the shelves of the nation's giant retailers stocked with goods.

The difference now, say many, is that an already struggling industry is now being drained by its very own customer base.

No supplier disputes that retailers, most notably department stores, are having a tough time of it. It's no secret that profits are down for the American retailing industry. Indeed, the most recent edition of the Home Textiles Today Retail Report Card found that composite profits for 30 key retailers tumbled by 20 percent last year.

But at least retailers were still making money, even if less of it. Not so for many of America's leading home fashions suppliers. The 15 public home textiles companies ranked in this year's Vendor Report Card posted a composite loss of almost three-quarters of a billion dollars. Fully two-thirds of public home textiles companies, 10 out of the 15, lost money last year. The composite loss totaled $669.1 million, compared to a year-before composite profit of $289.7 million — a one-year drop in profits of almost a billion dollars.

Nor do the problems stop with chargebacks or unauthorized deductions, say suppliers. The horror stories are endless.

What other kinds of things are retailers up to?

It's not unheard of for retailers off on a supplier-paid junket to visit a sourcing partner's plants, and then, within hours of a plant tour, and while still on the supplier's dime, attempt to deal direct with the foreign manufacturer, cutting out the U.S. middle man.

Other retailers have sent spreadsheets to key accounts, asking them to supply all the specs for the products they're bringing into this country — and in a coupe de grace, asking as well for the names of their off-shore producers. Increasingly, retailers are going into competition with the suppliers they're buying goods from.

Some suppliers probably deserve the compliance fees they get hit with. But what about the retailer who levies a fine of $500 if a shipment is short just one $6 item?

And some suppliers have been hit so often with compliance fees for mislabeled cartons that they're now taking the precaution of photographing every carton that gets shipped to certain retailers.

Are chargebacks and unauthorized deductions more prevalent in any one channel of distribution? Absolutely, say suppliers. A whopping 81 percent finger department stores as the biggest problem. Discounters are far behind, named by only 10 percent in the survey. Specialty stores, cited by just 5 percent, run the cleanest businesses, say suppliers.

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