Chargebacks Reform: Vendors Hope Probes Level the Playing Field

With chargebacks on center stage in the Saks Fifth Avenue investigation, the question on people's minds is: Can the industry be rehabilitated?

NEW YORK — With chargebacks taking center stage in the Saks Fifth Avenue investigation, the question on people's minds is: Can the industry be rehabilitated?

Stories of outrageous chargebacks and markdown contribution demands from all the major department store groups have long been rampant on Seventh Avenue. It continues to be a sensitive subject, and very few vendors agreed to speak for attribution, fearing department stores could terminate relations with them.

But the tide appears to be turning in the chargeback battle. A number of vendors have formed a formal group to address the issue even as speculation increases that the U.S. Attorney's office in Manhattan might broaden its probe of Saks Fifth Avenue into an industry-wide investigation covering all department stores.

As reported, Saks Inc. is widening the internal investigation over chargebacks and related accounting issues at its Saks Fifth Avenue unit to cover categories beyond the bridge area. Saks Fifth Avenue's chairman and chief executive, Fred Wilson, also is vowing to fully repay 12 bridge vendors in an attempt to put the issue behind the retailer. Meanwhile, Nordstrom last month revealed for the first time the scale of its vendor allowances, reporting that they amounted to $206.4 million in 2004. The largest single amount came in "cosmetic selling expenses," which totaled $96.9 million.

Yet, despite the Saks investigation, industry insiders don't believe chargebacks or markdown contributions will disappear.

"It's like a morphine drip," said one industry source. "In the short term, you want relief so you can rehabilitate, but in the long term, it's an addiction, and you are addicted to carry forward with these guarantees."

"You can't keep draining the manufacturers because they are the ones who give you the juice," said an executive at a Seventh Avenue apparel firm.

That said, many are hopeful the latest controversy over chargebacks will result in a clearer relationship between vendor and retailer.

"I think that there's a new feeling among vendors that, for the first time, there is a window open to the possibility that the playing field can be made more level," said Donald Kreindler, partner at law firm Phillips Nizer, which is helping to form the vendor group to discuss the issue. "Vendors have reacted very enthusiastically to the concept of a council being set up to develop fair and equitable standards for the relationship between retailers and vendors."
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