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)
- 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.
It 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.
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
Purchase 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:
- 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.
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!