Wal Mart’s other Dirty Little Secret

Wal Mart’s other Dirty Little Secret

By Nate Noy

Did you know that Wal Mart, Home Depot, Rite Aid, J. C. Penny’s and virtually every large retailer in the United States costs you and me, the US consumers, millions of dollars every single day by illegally abusing their vendors?

This article explores retailer chargebacks and provides a focus towards:
· How the relationships between large retailers and their vendors are ones of economic dependency;
· An exploration of the predatory, opportunistic and illegal practices of the dominate firm retailers;
· The impact of unfair and abusive chargebacks (a.k.a. post-audit deductions and retailer expense offsets) not only on vendors, but also the entire supply chain and ultimately the end consumer.

Unless you work in logistics or auditing you likely have never heard the terms: chargebacks, post-audit deductions, vendor compliance penalties, or retailer expense offsets (collectively referred to as chargebacks). Odds are you don’t really care what these terms mean and you figure if they were really all that bad some lawmaker or regulator would have already done something to stop them.

The simplest way to explain chargebacks is to illustrate some specific examples that were taken from the actual vendor compliance guides of various major retailers:

· If a vendor sends a shipment of product to a retailer a single day earlier than originally scheduled they face a 5% fine (measured by the cost of the merchandise); send it one day late and the fine is 10%.
· Make a mistake with a bar code and face a $3,000 fine.
· Transpose two digits of a store id number: $250.
· Miscount the total units shipped on the packing slip by one: $250.
· Have a pallet displace during transport and cause some minor damage: $10,000 fine (or more) and the retailer will also refusal to accept shipment.
· Send a box that is one ounce over the 40lb weight limit and pay a $100 fine.
· Send a package that violates more than one of the above and receive fines for EVERY violation: if a vendor makes a really big mistake they can end up actually owing more to the retailer than the value of the merchandise received, i.e., they pay the retailer to take the product.

The above is just the tip of the iceberg. Most compliance guides include “administrative fees” of $250-$500 per the occurrence of any issue. (Think about that one for a moment: Wal Mart creates a rule that is virtually impossible to comply with 100% of the time. You mess up, they fine you. Then they charge you an extra $500 so they can pay someone $5.15 an hour for the four or five minutes it may take to correct the problem.)

Chargebacks have been reported to reach well into the six-figure or even seven-figure range. Some distribution centers actually employ more compliance auditors than material handlers, and a few retailers have been known to literally pull out a tape measure and assess a fine (plus the administrative fees of course) for a label being fractions of an inch off the schematic.

Still don’t quite understand the problem here? Think about chargebacks in terms of a couple of real world parallels for a moment:

· Everyone has likely placed postage on a letter that included the instructions “affix postage here.” Most of us have placed the stamp at least somewhat off the exact square it is intended for. Imagine if you will that the utility company on the receiving end of your letter fined you $500 for not placing your stamp in the exact location as instructed? Further they give you the ultimatum that you either can pay them the $500 or they will shut off your electric. That is EXACTLY what the retailers are doing to their vendors each and every day, but the problem is far worse than this example.

· Most people also had a lucky friend growing up. By lucky I mean their mom or dad was an accountant, attorney or doctor and they always had the really cool toys and sports equipment. This “friend” was also likely to be the one making the rules of the games the kids of the neighborhood played, since after all it was his stuff everyone was playing with. He would also often arbitrarily change the rules of the game mid-stream because his team was losing. And of course on more than one occasion someone would protest a rules change and the lucky friend would threaten to take his ball and go home, leaving everyone the option of either accepting the new and usually biased rule or not playing at all. That is the decision that faces the vendors of large retailers; the vendors can either live with an abusive relationship or opt to quit doing business all together.

If you ask the Wal Mart and Rite Aides of the world whether there is any legitimacy to the above claim they will tell you that vendor compliance must be forced upon their business partners to drive efficiencies in the supply chain. They will also note that most vendors enter into these relationships fully aware of the penalties the vendor will face for non-compliance. What Wal Mart fails to disclose is:
· Most retailers have turned chargebacks into a profit center.
· Most retailers have completely different sets of rules than all other retailers; meaning that each vendor must manage 5, 10, 20 or even 100 different sets of compliance requirements.
· The Uniform Commercial Code the law that in some form governs the relationship between vendors and retailers in every state expressly forbids the retailer from assessing a “penalty” on their vendors which is exactly what they are doing.
· That this type of practice violates numerous state and federal antitrust laws but the US Federal Trade Commission and Department of Justice (the federal agencies responsible for enforcement) have not taken any significant actions in this arena and short of Congressional Inquires that force the issue they likely never will.
· That Canada and countries in the European Union including France and Germany not only have laws that prevent this type of behavior (economic dependency laws) but they actually enforce such laws.
· That virtually every lawsuit brought by a vendor (almost always involving a vendor that has already been put out of business by this practice) against the retailers for this issue has been settled out of court with strict non-disclosure terms.
· That no one vendor is foolish enough to ever challenge this practice because the retailers have the power to permanently black ball the vendor and put them out of business.
· That most vendors now consider chargebacks as a “price of doing business” with a large retailer, this forces them to pad their price to offset lost revenue, which in turn directly leads to the end consumer being forced to pay more for all products.

Chargebacks are examples of the opportunistic, abusive and illegal practices that virtually every major retailer forces upon their own vendors. This in turn prompts the vendors to raise prices and the end consumer ultimately bares the cost of this predatory practice by the retailers.

So the question of the day is: what can be done to end this abuse?

The unification of all vendors to pool their combined leverage would be one great approach. However, no individual vendor is willing to take the risk of organizing such an effort. In fact, vendors are not even willing to join small groups to address this as they fear they will be ostracized or black balled by the retailers for taking such a stance.
There are has been some activity by trade associations in various industries to battle abusive chargebacks, but each trade association, as they should, has the special interest of its own group at the forefront of its agenda and a general solution to the problem will never make the radar screen of a special interest group not specifically created to address this.

Vendors certainly have legal recourse at their disposal, but lawsuits are rarely a good thing in our economy. The UCC code and anti-trust law is the most likely means currently available to bring an end to this illegal activity. The American Bar Association Section of Antitrust law has a position on anti-trust in general. In a letter to the FTC dated 2/13/03 and titled Report on Antitrust Policy Objectives the ABA Section of Antitrust law noted: “the Report recommends that economic analysis, i.e., in terms of efficiencies, should play a central role in the application and enforcement of antitrust laws.”

There is little question that abusive chargebacks are highly inefficient. There also is little doubt that in the litigation-happy world in which we live that 1000’s of trial attorney’s have cracked a really big smile as they read this and realize this article has just made them aware of a new class action lawsuit opportunity. Hopefully cooler heads prevail and this issue can be resolved with good old fashion grassroots and advocacy efforts that lead to a public backlash.

You may ask yourself: what would the elimination of this truly accomplish? One argument is that by doing away with this system those $19.95 pair of loafers you are wearing could be purchased for $16.95 and you can buy one more gallon of gas. Even if consumers don’t directly reap all of the benefits of this, at least the large retailers of the world will be forced abandon a practice that reeks of Microsoft (an issue for another day.)

I, Nate Noy intend to make illegal chargebacks an issue that receives significant attention during my campaign. If elected I intend to educate fellow lawmakers regarding this practice and inquire as to why the FTC allows such a practice to persist absent any government intervention. The role of government is to protect us and by eliminating abusive chargebacks a result will be created that will lead to direct benefits for U.S. consumers.