California Apparel News

In these tough economic times, chargebacks are taking on increased importance for apparel manufacturers trying to guard their profit margins.

In a Feb. 5 panel discussion organized by the California Fashion Association at the California Market Center and moderated by Robert Ezra, a partner with Ezra Brutzkus Gubner LLP, a law firm in Encino, Calif, a number of experts offered their advice on trimming the number of chargebacks, margin allowances and markdowns that retailers take.

Chargebacks essentially are money taken by retailers when clothing makers and other suppliers fail to comply with the retailer’s guidelines for delivering merchandise. Infractions include not delivering orders on time, sending damaged goods, failing to put hangtags on properly, sewing in labels incorrectly and a host of other items. Each retailer has its own set of vendor guidelines that must be followed to get merchandise to the store floor quickly and avoid chargebacks.

“Starting with Wal-Mart, the retailers at some point decided they had to quicken the pace of getting goods to the sales floor,” said Mark Brutzkus, an attorney with Ezra Brutzkus Gubner LLP. “From there, we have run into the dynamic where some vendors perceive the retailers using chargebacks not for the purpose of getting goods efficiently but rather as a means to generate profits. The retailers dispute that and say they are using the chargebacks so they can process goods. There is really truth to both sides.”

Experts noted that before you can even start reversing chargebacks, you must document every order you send. The same holds true for margin allowances and markdowns. Margin allowances include manufacturers paying part of the retailer’s cost to promote certain merchandise in newspaper ads or fliers. Markdowns are discounts that retailers give to customers but come out of the vendor’s pocketbook.

Robert Prather, the Western regional sales manager for Smyth Solutions, an industry consultant, said companies have to be diligent in reducing chargebacks that quickly become costly. “I [had a client who] got a chargeback of $1,000 because there was a one-piece shortage on an order,” Prather noted. These days, chargebacks cost a minimum of $250 an item.

To cut chargeback costs, Prather suggested building relationships with the retailers and working to resolve mistakes. “Do you know the vendor-compliance manager at Dillard’s or JCPenney? Those are relationships you have to have to be successful. If not, when you have a problem and pick up the phone, you are not going to know who to call and will be going around in circles,” he said.

When a chargeback is taken, Prather advised companies to remedy the situation by meeting with their department heads in the warehouse, shipping department or quality control and working out a solution. “Make those corrections and then say to the retailer, ’We have fixed it,’” he said. “Ask them to monitor your next two or three shipments. If they come through clean, there is a good chance you will get a lot of that [chargeback] money back.”

Sometimes, when vendors and retailers can’t resolve their chargeback disputes, they end up in a legal tussle. “The position we take legally is that before the retailer can take the chargeback, they have to give the vendor notice to cure a defect,” Brutzkus said. “Often by the time the retailer notifies the vendor about a chargeback, the goods are on the sales floor and the vendor can take no action to deal with chargebacks and are left with them.”

Because of that, Brutzkus recommended that manufacturers scrutinize how they are doing things and take the necessary steps to be compliant with the retailer’s vendor requirements.

If a retailer cancels a private-label order, manufacturers can minimize their losses by selling those goods to another retailer as long as the clothing meets all the label’s specifications, Ezra said. “You have an obligation to mitigate damages,” he said. “As long as the goods met specifications, you can sell them with the customers label.”

Lynne Sperling, a manufacturing and retail consultant with Sperling & Hileman Group, suggested numerous ways to minimize markdowns and increase sell-throughs. In some ways, manufacturers these days have to be as much a retailer as the retailers themselves.

“You have to be more proactive to see what you have on order, looking at how and where your merchandise is performing,” she said.

She advised apparel makers to contact the general merchandise manager or the buyer of a store on a monthly basis rather than every six months to keep communications flowing. “Your sales organization has to be on top of where your sales are and what your markdown liability can be and what you have accrued as discounts,” she said.

Analyze in which stores your merchandise is selling, get monthly sales reports and how much they have been marked up or marked down.

Vendors should not accept orders without thoroughly reading through the terms, understanding how each charge will affect profitability.

In November, Sperling and a client sat down with a retailer and looked at the price the manufacturer’s goods were fetching. “There were ridiculous markups and very slow turns of about 1 to 2 percent a week,” she said, noting the clothing had been marked up 75 percent to 77 percent. “We took the product down to a realistic 55 percent and it sold 7 to 12 percent per style without a sale. It tells you the consumer knows the right price.” —Deborah Belgum