Vendors are taking a tougher stance over chargebacks, even as their concerns mount, that the mergers of groups such as Federated Department Stores Inc. and May Department Stores Co., and Sears, Roebuck and Co. and Kmart Holding Corp. could result in increased pressure from retailers on margins as the two retail giants gain unprecedented power in their respective sectors. Meanwhile, the industry is eyeing whether a Securities and Exchange Commission probe into Saks Inc.’s accounting methods and its improper collections of vendor markdowns a few years ago could spread to other retailers.
“This [the Saks probe] could open a whole area of exploration at other retailers,” said Michael Appel, managing director of Quest Turnaround Advisors. “There are two pieces — retailers using their leverage over vendors to take chargebacks they may not be entitled to, and whether that can be construed as being anticompetitive.”
Appel and other executives said smaller retailers are at a competitive disadvantage because they don’t have as much clout over vendors to demand allowances.
“I would be surprised if [the SEC] does not look beyond Saks because Saks is not the only store that vendors are complaining about,” said Emanuel Weintraub, chief executive officer of Emanuel Weintraub Associates management consultants.
“Potentially, it could be a big problem. Saks is taking the brunt of it,” said one former retail ceo, who said it wouldn’t be unheard of for a buyer or merchandise manager at a big retailer to threaten to cut off a vendor that doesn’t play ball with markdown money.
According to Allan Ellinger, a principal at Marketing Management Group, the chargebacks scenario has cost the vendor side of the industry “billions [of dollars] over the last 15 years.” The consultant believes the problem has “worsened as business has gotten harder.”
He observed, “What used to be an issue for branded apparel vendors is now also a problem for private label vendors. As department store executives move into different tiers of distribution, they take the bad habits with them. Every retailer today, with the possible exception of Wal-Mart, is putting enormous pressure on the vendor structure.”