Nothing frustrates a shopkeep like bare shelves. After Akasha Crystals, an Ann Arbor-based stone and glass company, had been unable to satisfy Walmart’s orders throughout the spring of 2009, the retailing giant demanded payback.
Walmart's opening volley was incredibly specific: In July 2009, the retailer sent a detailed spreadsheet outlining each and every one of Akasha’s weekly shortfalls going back to March of that year, calculating that Akasha cost Walmart up to $609,809 in lost profits. By the end of the drama, Adam Kasha, the company's founder, managed to convince Walmart to accept just $300,000, paid in four installments. But that deal came with a catch: Kasha would have to lower his future prices, and if he fell short once in the next eight weeks, Walmart would charge him a penalty: $10,000 per week, per product.
How do small businesses get hit with these fines from big retailers? And once they do, how can they negotiate a lower fee?
So-called chargebacks such as Akasha's are common in retail, says Curtis Greve, a retail consultant based in Wexford, Penn., who spent twelve years working in Walmart's supply chain department. Big box stores' vendor agreements hold suppliers financially responsible for shortfalls. Technically, that means they can sue for damages. In reality, deals are often worked out informally. "Everything's negotiable," says Vanessa Ting, a consultant at Los Angeles-based Retail Path, who previously worked in merchandising for Target. "There were a lot of times when I was justified in getting all of the lost profits back, but I would either waive it or just split the difference."
Keep Your Buyer's Point of View in mind
Empty shelves make a section of the store look bad. But they also hurt the pocketbook of that section's buyer, says Greve. Bonuses are typically doled out according to departments' gross profits, and missing products mean missing sales. The penalties, therefore, are a way to soften the blow to the bottom line.
The flip side of this is that you can try to engineer compromises that will help the the store's gross profit in the future. Kasha agreed to a partial cash repayment, but also dropped his prices, improving Wal-mart's future margin. You can also pick up more of other costs, such as shipping, says Greve. Better yet: Offer to sponsor a marketing program with the retailer, says Ting. "Help drive attention and therefore foot traffic in those stores," she says, producing more profits for both of you.
Prepare to Lose the Customer
Even though lost profit penalties are contractually mandated, disputes over them rarely end up in court. Instead, the store just cuts ties and finds a new supplier. Unfair? Maybe. Such is life when one party is the biggest chain of stores in the world and the other is a smalltime distributor. "They have a choice between multiple vendors, and multiple items," says Greve. "If you're a manufacturer, you're under the sword."