Hansen Calls on Suppliers to Stiffen

Don Hogsett, July 31, 2006

Dallas — Railing angrily against what he calls the “fraudulent,” “coercive” and “institutionalized” practice of unauthorized deductions, Chuck Hansen, the maverick former ceo of Pillowtex Corp., a company driven first into bankruptcy and then to extinction, said disputed chargebacks “were no question a central factor” leading to the death of the company.

Realistically, Hansen is quick to admit that several factors, including the heavy debt he took on to fuel a costly string of acquisitions, including Fieldcrest Cannon, were at play in the demise of Pillowtex. “But you can't escape the fact that chargebacks were a major part of it, and retailers had a hand in the death of the company.”

Hansen said, “Just look at the math. When we took over Fieldcrest, combined sales of Fieldcrest and Pillowtex were $1.4 billion. And the unauthorized deductions — claims for shortages, late shipments, etc. — was in the neighborhood of $100 million that year. That's about 7% of the company's total sales.”

Underlining the dramatic effect on the bottom line, Hansen said, “These unauthorized deductions take four to five percentage points off your gross margin rate. That's absolutely huge.”

In fairness, he acknowledges, “Both the retailer and the supplier agree to a lot of these deductions up front — for advertising, for markdowns, etc. And the reality is that you build that into the price. And I have no problem with that. I think some chargebacks are well intended and deserved; they're intended to punish people for not doing what they were supposed to do. But then the practice was expanded to suit the retailer's purpose, to enhance his profitability.”

“Look, a retailer has two levels of profit — from an operational perspective and from a marketing perspective. And the reality is that today they make less money from selling product, and more from the operational perspective, including chargebacks. It's become a major profit center for them. When you add it all up, the markdown money, the advertising, the slotting fees, the store opening fees, it's really big money. And it all comes out of the suppliers' pocket. In some cases, the retailers are making money only at their suppliers' expense.”

Getting even more blunt, he said, “In some cases there's outright fraud. I'd say as much as 25% of all the chargeback dollars are fraudulent. Absolutely.”

A case in point was a big Pillowtex customer: “We had a chargeback involving about $15 million. I know because I had to get directly involved. We shipped them several hundred thousand blankets, and they said they never got them. Well I got involved, flew to their headquarters, showed them the proof that they got the goods. It was like being a bill collector. I had to bully them, and they finally gave us a check for $10 million on the spot. And when we got back, I instructed our general counsel to file a lawsuit for the balance. Then the retailer went belly up, and we had to eat the remaining $5 million. And they do that all the time. If you scream loud enough they settle, but just for maybe 60 or 70 cents on the dollar. You have to eat up the rest. How can any supplier make money doing that?”

One of the most common offenses, said Hansen, involves advertising dollars. “There were cases, more than one, when they deducted for the ad before the ad ran, and then they never bought the ad. It's clearly fraudulent, and it happens a lot.”

In part, said Hansen, suppliers must shoulder some of the blame for letting it get out of hand. “Who fights back? Everyone's afraid. To some extent it happens because people let it happen. And the retailers really rely on some vendors never opposing it very far. Or they negotiate it. They say 'Okay, I took away $100 from you, so I'll give you $50 back.' That's what they call negotiation, but they're still holding a gun and a hammer.”

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