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?

Kreindler also was quick to point out that "nobody is suggesting that valid and proper chargebacks should be eliminated. It is a question of what chargebacks are valid and appropriate. If a vendor fails to meet reasonable requirements that have been set forth by the retailer, then the retailer would have every right to issue a chargeback to reflect [that] nonconformity….Proper chargebacks for nonconformity with reasonable requirements is all that any vendor could ask for."

While there is skepticism that the result of all these probes will be the disappearance of chargebacks, observers expect some good to come out of the investigations, for retailers and vendors alike.

"I think that what [the Saks problem] will do as far as retailers are concerned is to provide an impetus for the others to take a hard look at their internal processes, looking at whether the procedures will stand up to this new scrutiny that may come from Sarbanes-Oxley [a federal law passed in 2002 that mandates certain financial and accounting disclosures] and whether they have the requisite documentation to back up the charges sought. You may see some retailers revise their processes, which would provide an opportunity for collaboration between them and vendors. I think vendors will have a bigger say than before," observed Jessica Butler, principal of Attain Consulting Group, a deduction and chargeback management advisory firm.

"I think it's going to make retailers more sensitive as to how they deal with vendors, and hopefully it will enable vendors to require clarity as to what the charges are and aren't, so there is a mathematically transparent way to reconcile whether money is owed," said one industry insider. "Taking a look at models around the world, what could happen is that more and more concession [leased department] models emerge, and then you really are on your own."

Many hope the result will be agreements that are fairly monitored throughout the season.

Richard Rosenthal, president of Alvin Valley, said, "As a general principle, chargebacks relieve purchasers from responsibility for their orders by requiring vendors to indemnify sell-throughs. Retailers overbuy and undermerchandise with impunity based on arbitrary markdowns all over."

Ideally, retailers would negotiate discounts with vendors in advance, he said. "This way, retailers have some vested economic interest in the success of the product selling," said Rosenthal.
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