A little bird tells me that Nick and Nora, the 20 year flagship manufacturer of high quality ladies pajamas will cease production of the popular product line which is mostly sold in department stores. Little bird stresses the line is both profitable and popular but that the company has become fed up over department store chargebacks to the extent that they no longer choose to manufacture it. As I wrote in the entrepreneur’s guide, department stores are not the choice vendor accounts they once were. 10 years ago, stores withheld payment on invoices for 60-90 days while today it seems most stores are holding paper for 6 months.
In a NYT article published yesterday, Stores and Vendors Take Their Haggling Over Payment to Court details that chargebacks have become such a problem that the Securities and Exchange Commission and the United States attorney’s office is investigating Saks for violations. Last week, Saks -which has admitted it has “overcollected” chargeback fees from manufacturers- fired 3 executives for what was described as kickbacks.
I doubt that consumers are aware just how much chargebacks have limited their clothing choices. With the current system of department store fees and penalties leveled against manufacturers, wholesale pricing has to be higher to cover the arbitrary discounts that stores take for themselves. For example, it’s common to offer discounts of 2 to 8 percent on invoices paid within 10 to 30 days but stores are paying in 5 to 6 months and taking the discount anyway. While it seems that the number of manufacturers who have sued their customers seems to be increasing, it’s difficult to know the exact figures as retailers are settling out of court with non-disclosure a condition of settlement. The situation for many manufacturers has been to see their invoices reduced by half.
I don’t understand why stores are cutting off their noses to spite their faces when mall traffic continues to fall and department stores are fighting neck and neck to get people into the stores (see TV, blogs, girlie-girls and call of the mall). With the only products available there (push manufacturers) the range of product fit and styling continues to degrade. Hopefully stores will realize that chargeback fees will become untenable for their domestic manufacturer suppliers before it’s too late.
For all of you my advice remains unchanged except that I’d strongly suggest you read Paco Underhill’s Call of the Mall and Why We Buy: the Science of Shopping. Department stores and malls, while prestigious for a new line, are not the selling venue they once were and haven’t been for a long time. Pull manufacturers (DEs) should stick to smaller specialty and boutique stores. You do not need a customer who can’t cover their invoice between delivery and 30 days.