When it comes to chargebacks, 2005 might be considered a watershed year.
As a result of the public scrutiny brought to bear on retailers by a number of high-profile cases — most notably an investigation involving Saks Inc. — vendors seized the moment to establish a formal coalition to deal with chargeback issues.
Chargebacks are fees charged to a vendor by a retailer, and relate to everything from customer returns and advertising fees to mislabeled products and incomplete orders.
Over the past decade, chargebacks have become a contentious issue between retailers and vendors. Privately, some vendors describe them as a necessary burden of doing business with big retailers. Others call chargebacks an abusive practice, while smaller suppliers say meeting compliance requirements to avoid chargebacks is an expensive barrier to entry to do business.
From a retailer’s perspective, chargebacks are simply a way to maintain and bolster gross margins. Retailers say chargebacks are critical to running their operations in the most efficient way possible.
In June, a group of vendors formed a coalition, called the Vendor Coalition for Equitable Retailer Practices, to address chargeback issues and other key business practices. The guiding concepts of the organization include: educating vendors and retailers about the laws that govern their relationship; developing practices that are fair and equitable to both retailers and vendors through a partnership between the two bodies; recognizing the need to view retailers as partners instead of adversaries, and acknowledging that the organization represents the whole vendor community.
The movement to establish the vendor group was aided by the high-profile attention paid to retailer accounting practices this year, much of which centered around Saks Inc. The luxury retailer faced ongoing investigations of its accounting practices, including chargebacks, by the Securities and Exchange Commission and the U.S. Attorney for the Southern District of New York, as well as vendor-initiated lawsuits.
An additional internal investigation of the company’s practices led to the ouster of three senior executives in May, followed by a company announcement in August of its intention to reimburse vendors more than $48 million resulting from improper markdown allowances collected between 1996 and 2003. Industry speculation at the time the money was repaid centered around Saks’ bridge labels and contemporary sportswear.
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One of the vendor lawsuits involved International Design Concepts LLC, which sued Saks Inc. and Saks Fifth Avenue Inc. in Manhattan federal court over the company’s markdown allowances and chargeback practices. A similar lawsuit filed by Onward Kashiyama was later settled. The IDC suit is still pending.
There were other lawsuits this year as well. In April, Ben Elias Industries Corp. filed a suit against Dillard’s in a federal court in Arkansas. But the case was later dismissed without prejudice. There’s also an ongoing class action suit against Federated and its divisions regarding the practice.
From here, it’s unclear how much momentum these efforts by vendors will have on the practice of chargebacks. The coalition is currently putting together suggested guidelines to improve and make more fair the relationship between vendors and retailers.