This is an article a friend of mine, Ray Bowman, International Trade Consultant, wrote about the cut-throat strategies of big businesses which routinely put small businesses like mine (and bigger ones too!) out of business. I have been asked many times why don’t I sell to Macy’s? Why can’t you find Betty Belts in a mall chain store? Well, Ray explains it pretty well in his insightful piece below.

Dancing with the Devil—Doing Business with Large Retailers
By: Ray Bowman, Bowman Business Services

As an international trade consultant, I sometimes have to assist my clients with certain issues that just raise my hackles. One such issue is the large retailer imposing business practices on the small- to medium-sized vendor that are frankly reprehensible.

BULLY MENTALITY
In the quest to provide the inexpensive products demanded by the American public, large box retailers have become “creative” in generating new profit centers. The true profit margins on most products are exceedingly thin, so large retailers have turned to some questionable tactics in dealing with their vendors. And it is difficult for the vendors to protect themselves or fight back due to the sheer weight these retailers have behind them. The large retailers have become the lunchroom bully, taking whatever they can shake out of the pockets of their vendors. Many of these vendors do not survive their encounters with the large retailers.

SWITCH and BAIT
In order to win a contract with a large retailer, many vendors have to offer a substantially lower cost point. To do this, vendors will make a contract with their manufacturer of a certain price based on a certain number of production units. Of course, this number is based on the “promised” number of units purchased by the retailer. But after negotiating a low price on an item, large retailers frequently substantially slash the number of units they order. This leaves the vendor paying a higher price to their manufacturer for a smaller quantity, eating into their already diminished profitability.

SHORT PAYS
It is not uncommon for large retailers to short pay vendor invoices. Frequently they will cite an inconclusive or unproven performance violation as their reason for doing so. However, I have had many clients who were short paid on invoices with little or no information regarding why they were short paid. With the legal counsel that the retailers keep on staff, smaller vendors do not have the capacity to fight the fight to get what is owed to them.

According to the publication Home Textiles Today (2005), Oscar de la Renta Women’s Sportswear was put out of business after retail giant Saks Fifth Avenue deducted nearly 35 percent of its product invoices totaling $90 million. That represents a $31.4 million short pay!

CHARGEBACKS
For those business owners not familiar with the term chargeback (lucky you), the term represents the monetary penalties assessed against vendors for non-performance violations. These non-performances violations can include, delivering to the retailer’s distribution center late, delivery of products that are defective, failure to pass a random inspection, customer returns and so on. Chargebacks have their place in protecting retailers from non-conforming products that can cost millions of dollars in product returns or wasted advertising dollars for products that aren’t available. However, the problem is when retailers abuse vendors through the use of chargebacks.

I recently assisted a client (and I am going to keep this anonymous as there is a pending legal case) that had a contract to provide house wares to a major retailer. The retailer paid $25 per item, and resold the item for $45. Whenever the retailer returns the item to the vendor, even if the item was damaged at the store, sold at a discounted sale price, or returned by the customer even though it was not defective, the vendor pays the retailer…$45! If that hasn’t angered you, this surely will. A huge shipment of these items were damaged in transit, and the retailer declined the order. My client then spent nearly $500K to repair the damage. But not all the items could be saved, creating a shortfall of items provided to the retailer. The retailer had not paid for these non-delivered items. However, the retailer is suing my client to recover a chargeback of $45 for each item not delivered! Oh, plus penalties for delivering late, even though they originally declined the order.

In another article in Home Textiles Today, it was cited that $13.3M of the $63M profit reported by retail giant Linen’s and Things in 2004 was chargebacks and vendor allowances. That equates to 21.1% or a fifth of their profit made off the backs of their vendors. In the second quarter of that year, the retailer cleared only $879,000 on its own…but the chargebacks and vendor allowances totaled $4.1M! The third quarter brought in another $7.9M from chargebacks and vendor allowances, while the chain brought in a paltry $30,000.

Using this example, it was estimated that $1 out of every $5 of profit made by American large box retailers was due to chargebacks and vendor allowances! For more articles concerning this topic, visit the Home Textiles Today website at www.hometextilestoday.com.

HOW TO AVOID BEING A VICTIM
Read your purchasing agreement with any retailer thoroughly and completely with the help of legal counsel. These purchasing agreements are very detailed (and the devil is always found in the details) so they usually include lots of language about penalties, delivery dates, product compliance and inspections. Be carful of language that addresses margin support. Margin support is a clause that addresses how you, as the vendor, will maintain the retailer’s margin. If you agree to maintain a certain margin, be sure that margin does not include shrinkage (theft), employee discounts, return allowances and so on.

Your agreement should also address penalties, damage and claims. Any fixed penalties should be based on actual not anticipated loss. Damage claimed by the retailer must reflect damage that you had control over to avoid. In other words, if the retailer picked merchandise up from your factory, then damage in transit should not be your fault. In the event of a retailer claim, make sure your agreement specifies that the claim must be substantiated in writing with sufficient notice for you as the vendor to act.

There are many other important considerations, but they are too numerous for this column. There is however support for small- and medium-sized businesses. A law firm called Phillips Nizer LLP, specializing in chargeback cases, has established a “Vendors Coalition for Equitable Retailer Practices” otherwise known as V.C.E.R.P. (www.phillipsnizer.com). This group is dedicated to informing vendors of their rights and educating those retailers establishing true partnerships with their vendors.

For questions or comments on this article or suggestions for future topics, please e-mail me at [email protected].

– Ray Bowman