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One Out of Five Profit Dollars?

Just how much retailers siphon out of their suppliers' pockets each year in the way of chargebacks and allowances — some authorized, some not — is anybody's guess. But clearly, it's likely to be many billions of dollars.

There's no way of knowing precisely just how big that chargeback pie is. But let's try anyway.

Using Linens'n Things as a starting point, let's extrapolate. But let us also concede this is not scientific, just a quick shot at a moving target.

Each year, in its Retail Report Card, Home Textiles Today tracks the financials of key public retailers who sell home textiles, some of them financially strong, others not and leaking red ink. During 2004, under a new set of accounting rules, Linens'n Things reported a profit of $60.5 million, and took in $13.3 million in the form of chargebacks and vendor allowances. That means suppliers directly contributed 21.1% of the retailer's bottom line.

During 2004, this broad sampling of 33 public retail companies recorded a composite profit of $23.9 billion. If Linens'n Things is any kind of a rough guide — with chargebacks adding up to 21.1% of its profit — that could suggest that the broader sample of 33 companies, with its overall profit of 23.9 billion, pulled somewhat in excess of $5.0 billion out of the pockets of its suppliers that year.

Try looking at it this way to get an idea of what that means to home fashions suppliers. During 2005, the 15 largest home fashions vendors generated a total of $6.9 billion in sales, and that represents a scary drop of $532 million, a decline of 7.1% from the year before as retailers hammered down prices and cut U.S. suppliers out of the loop by going off-shore to buy low-cost product.

That $5.0 billion in hypothetical chargebacks is an amount equivalent to more than 72% of the dwindling sales brought in last year by a battered home fashions industry's 15 largest suppliers. That's the equivalent of the combined sales last year of Springs Industries, WestPoint Home, Mohawk Home, Pacific Coast Feather, Sleep Innovations, Franco Manufacturing and Hollander Home Fashions.

And that's just the start of it, one small slice out of an even larger pie. The Home Textiles Today sample of 33 public retailers used as a reference point includes just those who sell home textiles. It doesn't include, for example, apparel chains like The Gap, or electronics giants like Best Buy and Circuit City. Total up all those various retail formats, and all the various ways they use to strip money out of their suppliers' pockets, it's anyone's guess how high the total can climb.

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