California Apparel News

The consolidation of two of the country’s largest department- store chains means that chargebacks will probably be on the rise next year for apparel manufacturers.

“My sense at this point is that vendors [apparel manufacturers] are at a severe disadvantage in dealing with the retailers. You have a consolidation in the retail market, there are a limited number of retailers to deal with, and the chargeback issues are starting to make their way down the food chainhellip;. Right now, it is only with the majors, but it is filtering down to other retailers as well,” said attorney Mark Brutzkus, a partner in Ezra Brutzkus Gubner LLP, a law firm in Encino, Calif., with several apparel clients.

Brutzkus was one of four people speaking on a panel organized by the California Fashion Association at the California Market Center on Dec. 1 to address the issue of chargebacks and how to avoid them.

Brutzkus called for federal legislation that would define when retailers could take chargebacks and how they should deal with their vendors.

Other panelists were Lynne Sperling, owner of The Sperling & Hileman Group LLC, a retail and manufacturing consultancy based in San Marino, Calif.; Robert Prather, owner of A/R Management Services, an accounts-receivable and chargeback consulting firm based in La Verne, Calif.; and Robert Ezra, partner in Ezra Brutzkus Gubner LLP.

Panelists warned that garment manufacturers currently doing business with The May Department Stores Co. who are not carrying forward their business with Federated Department Stores Inc. will probably experience delays in getting their invoices paid. They could also see higher chargeback costs.

Chargebacks are costly penalties that retailers impose on apparel manufacturers who supply their stores. It is a laundry list of items that range from late delivery and illegible bar codes to failure to adhere to shipping instructions, packaging specifications and routing requirements.

With Federated’s purchase in mid-2005 of The May Co.’s 490 stores, Federated now operates about 950 department stores throughout the country. Next year, Federated will close 82 stores and change most May Co. stores to the Macy’s nameplate. Four May Co. stores will be closed and reopened under Federated’s Bloomingdale’s nameplate.

So getting a handle on chargebacks will be more valuable than ever next year.

Sperling emphasized that being clear on what the retailer has ordered is key to avoiding chargeback fees. “In order writing, if you take a bulk order and then you take the EDI [Electronic Data Interchange] a week or two weeks before you ship, what if it is distributed in a different way than the buyer wrote the order?” Sperling asked. “If they are different, it is important that you communicate with the buyer that you meet the requirement of the order. Either they rewrite the order and send you a new EDI, or you come to some way of solving the issue so you don’t have an order that is different from what you are going to ship.”

Sperling emphasized building solid relationships with retailers and establishing vendor partnerships. “The big guys are doing this with the Liz Claibornes, Jones New Yorks and Ralph Laurens, but a lot of the small people feel like they are being taken advantage of and can’t build a relationship. That is not true.”

Buyers and merchants don’t have time to do their own job, Sperling said. Manufacturers, if they want a strong relationship with their retail clients, have to do it for them.

To accomplish that, vendors should establish timely and effective communication, know their sales and gross margin performances by store location, determine what types of line discounts the retailers expect, and establish their receipt flow and product mix.

“If you are shipping dressy goods on Nov. 1 and stores have a 40-percent-off sale for Thanksgiving, what is that going to do to your business?” Sperling asked. “Basically you have to have an important role with the retailer and have a partnership.”

She also noted that if you have a markdown or chargeback problem with a retailer, you should determine its cause and come up with a solution.

Prather focused on reducing chargeback fees and figuring out how to collect them. After auditing one garment manufacturer’s chargebacks, he discovered that the retailer was taking the chargebacks based on gross dollars instead of the discounted price given the retailer. Other retailers will bill distribution- center chargebacks based on the full price a trucking company charges to transfer goods from one warehouse to another warehouse instead of the discounted fee normally given retailers. “Manufacturers sometimes don’t want to pursue this because they feel it will damage their relationship with their retailers,” Prather said. But he noted that manufacturers could use this information during their next retailer meeting to negotiate how future markdowns are taken.

He suggested that manufacturers have some kind of software system in place that tracks what chargebacks have been taken by which retailer. There should also be room for call notes showing whether someone was questioned about the chargeback and whether a refund was given. “Many companies don’t invest much money into their chargeback system,” Prather observed. “I go into companies that are doing $20 million or $50 million in sales and they are still using Excel to track chargebacks.”

Questioning chargebacks and collecting that money can be key to profitability. “The retailer can put through whatever they want, whenever they want, and it is up to you to prove that it is due,” he said. “The keys to effective collection are diligence and the ability to sell the idea that the money is due.”

Brutzkus said he usually enters the chargeback arena when manufacturers have already gone out of business or are in a financial spiral and sue a retailer for chargeback money. “Clients will go out of business and the retailer will pile on whatever markdown allowances and logistical chargebacks it wants to make, knowing they are not going to pay the invoice,” the attorney said.

Brutzkus noted that the recent investigation by the U.S. attorney’s office and the Securities and Exchange Commission into alleged illegal markdowns taken by Saks Fifth Avenue, the Saks Inc. luxury departmentstore chain, has affected the markdown and chargeback climate. In an internal investigation, Saks estimated it improperly collected more than $20 million in markdown money from 1999 to 2003.

“It has exposed the retailers’ dirty little secret,” Brutzkus said. “They are sharing their losses with their manufacturers, but they certainly are not sharing their profits.”