Archive | April, 2012

Chargebacks

Chargeback- Typically the term refers to the monetary penalties assessed against vendors for non-performance violations.


Selling to large department stores has become a very risky business and new companies should be aware and educated about ways to avoid the possibility of canceled orders and charge backs.  These charge backs can occur for a number of reasons. Some typical reasons could be when the store wants part-payment for any of your garments that have not sold and, or end up on the mark down rack, or if your shipment is late.  However, in reality charge backs are much more complex and will add to the manufacturer’s overhead costs and may even affect the pricing of the garment.  Manufacturers who want to keep selling to these big stores and rely on these types of orders will often try to cooperate with discounts and chargebacks and may compromise profit margins.  Unfortunately, it has become such a contentious issue that now some manufacturers refuse to sell to certain retailers because of these charge back issues and what some perceive as bullying tactics. For this reason many manufacturers have opted to open their own retail stores in recent years.

Some reasons for Chargebacks:

  • Late delivery
  • Defective product
  • Customer returns
  • Products not shipped together – (Tops and bottoms)
  • Labeling
  • Shipping infractions

Chargebacks Protecting the Retailer

Chargebacks originally had a valid reason and to some degree they still do in protecting retailers from non-conforming products, which can cost millions of dollars in product returns and, or wasted advertisement for products that aren’t available. However, the problem is when retailers abuse vendors through the over use of chargebacks. For certain larger department stores who abuse charging back it has become big business and charging back manufacturers has provided the retailer with other means of making a profit.

 

Chargebacks & Markdown Refunds

As listed above chargebacks can be demanded by a store for late deliveries, or for not following the manual of instructions from the retailer, and for a variety of other reasons, which often can seem totally unreasonable!  If too few garments sell at full price, sometimes department stores go back to the manufacturer to ask that they share in the losses from the discounted sales.  Even when the retailer may have made a bad buying selection or the weather has not been typical for the season, the retailer may try and pass on to the manufacturers these problems, when in reality it should not be the manufacturers’ burden. Ironically, markdown money, and or credit demanded by a retailer add to the manufacturer’s overhead costs and may boost the original wholesale price of the garment, which will then end up reflecting the retail selling price.  Another cost that retailers expect the manufacturer to share is the cost of advertising, or promoting the product through in store flyers and newspaper advertisements.  Or, even the positioning of the vendor’s product on the retailers’ floor space.

going out of businessIt has become difficult for the vendor to protect themselves or to fight back due to the sheer weight theses retailers have behind them. For the most part larger retailers have become the bully, taking whatever they can shake out of the pockets of their vendors. Many vendors do not survive this type of encounter with larger retailers. In order to win a contract with a larger retailer, many vendors have to offer a substantially lower cost point, which will compromise profit margins. To do this, vendors will make a contract with the manufacturer of the product, or adjust costing for in house production based on the number of units ordered for a certain price, often dictated by the retailer. But after negotiating a low price on an item, larger retailers frequently substantially slash the number of units they ordered. This leaves the vendor paying a higher price for production for a smaller quality of units that then eats into the already diminished profit margins.  The wise seasoned manufacturer will calculate for problems when costing garments that hope to sell to a larger retailer. They will also calculate for any allowable discounts that will be part of the deal.

Short Pays

Additionally large retailers will often short pay vendors invoices, frequently citing an inconclusive and often unproven performance violation as the reason for the chargeback. However, I have been aware of many manufacturers who were short paid on invoices with little or no information regarding why they were short paid. All larger retailers have legal counsel on staff that small manufacturers do not have, or the capacity to fight the fight to get the payment they are owed! There has been a history of many branded manufacturers’ who have been driven out of business due to unreasonable deductions and chargebacks. Often manufacturers will allow for these uncalled deductions because they want to continue to receive orders from these larger retailers as they have become reliant on the orders to operate.

How to Avoid Chargebacks

read your contractsPurchase orders from larger retailers are very detailed (can be the size of a phone book). These manuals usually include lots of language about penalties, delivery dates, product compliances and inspections.

Be aware of the terms related to “MARGIN support” which refers to how you need to address maintaining a certain margin for the retailer. Be sure that margin does not include shrinkages (theft), employee discounts, return allowance etc. All agreements should be based on actual not anticipated losses. Damage claimed by the retailer must reflect damages that the manufacturer can control or avoid.

  • Read your purchase orders with the help of legal advise
  • Agreement should address:
    • Penalties
    • Damages
    • Damages in transit – should retailer pick up merchandise from your factory then damages in transit should not be your fault.
    • Make sure your agreement specifies that the claim must be substantiated in writing with sufficient notice for you as a vendor to respond.

Should a manufacturer get unreasonable charge backs they will often engage a professional chargeback negotiator to work with the retailer in the hopes that the chargebacks can be reduced.  

Startup Manufacturers

To avoid all of the above nightmare scenarios, startup manufacturers should avoid taking orders from large department stores until they are prepared to sell to them as they can break a small company with one order.  It is far more advisable to diversify your PO’s  to a variety of smaller stores who will usually stay loyal to your company if you perform with your initial first orders. Smaller specialty stores are far less likely to charge back, but it should be noted that they have less buying power with the manufacturer. Plus, these types of orders are smaller and are also more time consuming to fulfill and will result in costing more in production. As with ALL aspects of your business it will be important to build good relationships. It may take time to make the right business connects for your business and also to find the right retailers for your product.

However, it will be important to investigate who you choose to sell to!

Selling on Consignment – For Profits!

Selling on Consignment

Since the economic downturn, consignment buying has become one of the newest forms of selling. Consignment selling can be an effective way to get your foot in the door and move toward selling your product through traditional selling on a wholesale basis.  But it will be VERY important to understand the nuances involved in this type of business transaction as it may not be a good fit for apparel and accessory selling due to the fact that clothing can be compared to fresh food. They both age fast and become worthless.

Consignment: Consignment selling is the practice of allowing vendors (retailers) to place your merchandise in their store for sale, with payments to be made after the merchandise is sold. The sale price is usually split 50-50. 

of retail store

Selling on consignment can be advantageous to both the consignor and consignee depending upon the consignment terms. Some shop owners try to be a little deceptive by slipping in hidden costs like ‘Buyer Fees‘ which are deducted from the sale price prior to splitting the sales proceeds, but for the most part, most shop owners will be local people with a reputation  earned and usually it will be important for them to keep,  and are basically honest people. Selling through a local connection is easier to controlled and the preferred method. Selling on consignment to stores that are outside of your local area will be very hard for you to oversee.

Selling Items online through eBay or Amazon are two other good examples of consignment selling online. Given the degree of success, this form of sales now rivals physical bricks and mortar stores in sales volume. But it’s possible that prices garnered for items sold online are lower than they would be in physical consignment stores because people still like to see what they are buying before purchasing. Unless the items sold online are already branded and the customer can identify with the brand. Knowing the brand the customer could have a preconceived idea as to the fit, quality and finish of the garment they are purchasing.

Used Clothing and Vintage is another example of items that are selling well in today’s market. One interesting FBI member/company that began selling vintage pieces online has now grown an impressive following. “NastyGal.com” now includes selling new products for junior contemporary clothing and is shipping millions per month.

 

As with most things there are Pros and Cons:

Pros: Consignment sales can be a good way to supplement your overheads and bring in some extra money by selling off old, or aging inventory. However, if you decide to offer consignment, you will need to setup very careful records.

 

Sales Agreement A contract or written agreement needs to be prepared for each consignor. The agreement should state when the payments are made, who is responsible for loss or damage (normally the consignor), and how long items should be allowed to remain in the store before it becomes old merchandise! Placement and display of consignors’ product can often be an issue, and therefore should be discussed beforehand. In a typical consignment agreement, the consignor furnishes an item for consignment and the store owner displays that item to the public. ‘Aged discounts’ refers to the practice of marking the price of the item down (by percentage or dollar amount) after a given number of days for the purpose of making the item more attractive to potential buyers. The item may be discounted several times over the course of time and if left unsold, will either be returned to the owner, forfeited to the shop, given to charity or marked down to such a low price that someone will surely buy it.

Questions to ask vendor:

Where will the product be placed in the store?

For how long will the items be in the store before mark down or returned?

What happens if the product gets damaged? Who is responsible?

How will payment be paid?

If the product should prove to be a good seller the retailer may offer the option to shift from consignment selling to a wholesale relationship within a set period of time (90 days is fairly common). Consignment selling can help you to create a track record of retail sales that you can then quote to potential new wholesale customers.

When sourcing inventory for their stores, retailers look for items that meet and exceed their customer’s expectations in terms of quality, style, function and price. They want items that provide good potential for profit, and they also want to work with suppliers (that’s you!) who are professional, reliable and will ship on time.  As with all parts of the supply chain it’s important to show that you are someone they would be happy to work with.

Look at more upscale consignment opportunities. Lower end consignment is not typically a good fit for small apparel manufacturers with a higher end price point. It will be a struggle to charge a fair price and make a sale.

Visit the store as a customer before contacting the store owner or manager. It will help you to get a sense of types of items already available in the store, their price points and whether your items would fit well with existing items in the store.

Should you get approached at a Tradeshow to sell to a vendor on consignment and you do have any history with this vendor and their store is a different state then be very courteous about accepting this business. Even stores like Bloomingdales have enjoyed s a bad reputation when it comes to paying on time.

Consignment Selling for Established Manufacturers, Tricks of the Trade

Selling off aging inventory on consignment to bigger department stores such as Niemen’s, Nordstrom and Bloomingdales is often termed in the industry as selling  “On Rollers”. They already have manufactured the goods so putting them in a department store on consignment can be a good gamble and a means to downsize inventory.  Often the manufacturer will then purchase their own goods back from the retail to prove that they can in fact sell through! They figure that advertisement charges to the branded label from these department stores are often a larger dollar amount and also a gamble on investment. So as the goods are already sitting in a warehouse somewhere, consignment selling can be another means to an end. Although you are buying back your own product at full retail price you have proved to the store that your goods can have a good sell through. So you can build a good history. You can now sell your product again possibly with a real order. The money you have spent in buying back your own goods has achieved a purpose that your goods will sell!

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