Chargebacks: Fashion Industry Chargebacks

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Retailer chargebacks in the fashion industry refer to fees or deductions that a retailer imposes on a supplier (often a fashion brand or manufacturer) for various reasons, usually related to non-compliance with agreed-upon terms, mistakes, or inefficiencies in the supply chain. These deductions are taken from payments owed to the supplier and can significantly impact the supplier's profits and cash flow.

Why do chargebacks happen?

Non-Compliance with Vendor Guidelines: Retailers have specific guidelines regarding packaging, labeling, shipping, and product quality. Chargebacks can occur if the supplier doesn't meet these requirements.

Late Shipments or Deliveries: Retailers expect timely delivery. If a supplier fails to meet delivery deadlines, it can disrupt the retailer's operations and lead to chargebacks.

Incorrect or Incomplete Invoices: Any discrepancies in invoicing, such as incorrect pricing, quantities, or discounts, can result in chargebacks.

Quality Issues: If products are damaged, flawed, or not up to the retailer's standards, they may impose chargebacks for the cost of addressing the issue or even the full value of the affected products.

EDI (Electronic Data Interchange) Errors: Retailers often use EDI systems for ordering and invoicing. Mistakes in this electronic communication can lead to chargebacks.

Returns and Deductions: Retailers may charge back for returned merchandise or deductions for discounts, allowances, or promotional costs.

Tips to avoid chargebacks:

Understand Retailer Requirements: Familiarize yourself with the retailer's vendor guidelines thoroughly. Adhere to all specifications regarding packaging, labeling, shipping, and quality standards.

Accurate and Timely Documentation: Ensure that all invoices, packing slips, and other documentation are accurate, complete, and submitted on time.

Maintain Open Communication: Keep lines of communication open with the retailer. Notify them promptly of any delays, quality concerns, or issues that may affect the agreed-upon terms.

Implement Robust Quality Control Measures: Prioritize quality assurance to minimize the risk of chargebacks related to product quality or damages.

Invest in Technology and Automation: Utilize software and systems that can help automate order processing, reduce errors, and improve efficiency in meeting retailer requirements.

Optimize Inventory Management: Efficiently manage your inventory to ensure timely fulfillment of orders and reduce the likelihood of chargebacks due to stockouts or overstocking.

Train Your Team: Educate your team about retailer guidelines and the importance of compliance to minimize errors and improve overall performance.

Negotiate Terms Clearly: Clarify terms and expectations with the retailer during the negotiation process to avoid misunderstandings later on.

By being proactive, understanding retailer expectations, maintaining high quality standards, and effectively communicating with retailers, fashion industry suppliers can reduce the occurrence of chargebacks and maintain positive relationships with their retail partners.

What is fashion industry chargeback?

A chargeback is a return of funds to another company.  When a company issues you a chargeback, they are requesting payment from you.

Most commonly, a charge back occurs from a retailer to a wholesaler.  For example, the wholesaler of brand ABC sells women's t-shirts to a retail store name XYZ.  After receiving the shipment of t-shirts, the retailer has found that the wholesaler did not properly attach price tickets in the proper location.  As a result the retailer will chargeback the wholesaler.  In other words, the retailer will request compensation for the error made by the supplier.

As a supplier, it is very important to understand all of the buyers requirements.  Following along with the example above, as a t-shirt supplier it is important to understand that some buyers request price tickets to be placed thru the garment labels on the inside neck of the shirt.  However, other buyer prefer the price tickets at the arm pit, or possibly the sleeve opening.  It is absolutely critical to know your buyers requirements.  You can not simply assume the placement.  Even here at Apparel Search, we may understand something about industry standards.  However, "buyers" are not required to follow industry standards.  They set their own standards...  As a supplier, it is important to understand the specific standards set forth by your particular client.  Do NOT rely on what you "think" is best.  Make sure you ask your buyer or face the consequences.

Note: the proper price ticket location, should have been adequately explained by the retailer in a memo, purchase order, supplier manual, etc.  If you are not certain, it is important to ask your buyer specifically.

If the wholesaler finds that the clothing factory made the error, the wholesaler may attempt to charge back the factory for the error.  If a factory finds that their supplier has made an error, they can possibly charge back their supplier.  Chargebacks can occur to any company along the supply chain that makes an error.

Most major retailers have a very large chargeback department.  Some fashion industry pundits say that the chargeback department may be the most profitable aspect of a retailers business (no, I am not going to tell you exactly who says such a thing...).  Because they are no longer in business, I am fairly comfortable stating that the former May Company, was notorious for tossing about large chargebacks.  That company was purchased by Federated Department Stores.  Federated changed their corporate name to Macy's.  I wonder if Macy's uses chargebacks as an art form... You can draw your own conclusions.

Retailers may initiate a chargeback to their suppliers for any one of a number of reasons.  Chargeback's are most certainly not limited to price ticket placement as illustrated in our example above.  That is simply one of the MANY possible causes.  A few examples would be incorrect label placement, incorrect UPC, late delivery, missing ASN, short shipments (I do not mean short pants; short shipment is shipping less units then the purchase order required), incorrect carton dimensions, etc.  Typically, the retailers supplier manual will include details regarding possible chargebacks and reason codes as guidance.

If you believe that the clothing stores are the lucky ones in this chain of events, you are not entirely correct.  Even retailers are faced with charge backs.  They get returns from unhappy customers.  If a product is not correct, it gets sent back to the store and the customer receives compensation (refund).  However, the retailer may do well and be able to side step this expense by charging back the wholesaler for the return if their was a quality problem...

Learn more about fashion retailer chargebacks.

Do all chargebacks get paid in full?  That is a good question.  Possibly, I will write about that in the future.

You may also want to learn about reverse logistics for the apparel industry.


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