The Supply Side: Retailer chargebacks could hurt margins for vendors

Retailers and their suppliers are poised for a stellar holiday season, with total sales expected to surpass $1 trillion, according to the National Retail Federation. Sales are forecast to grow between 3.7% and 4.2% year-over-year and are not adjusted for inflation.

Jon Allen, CEO of the Woodridge Group in Bentonville, said after factoring in inflationary costs, the actual sales growth will be muted for many suppliers. He said higher sales, more promotions and last-minute changes to orders and shipments also create the opportunity for increased deductions and chargebacks from larger retailers that can erode supplier profits.

Allen said every extra truck, every promo and online orders are opportunities for retail deductions, chargebacks and disputes that will hurt holiday profits by up to 15% of gross sales. Allen said 20% of the deductions may be preventable, but they are seldom challenged because they get buried.

“The fourth quarter is fantastic for revenue and also dangerous for margin,” Allen said.

He said common issues that can arise in the fourth quarter include complexity around promotions. Retail analysts have said this year’s promotions will range anywhere from 20% to 50%, depending on item categories. Also, the early and extended sales events that started in October can add to the fray.

Allen said common mistakes that result in higher deductions and chargebacks from retailers include mis-keying sales terms and unclear promo calendars, which will trigger “short pay” and trade deductions.

Retailers tighten the screws on routing, labeling, on-time in-full (OTIF) and content accuracy when volume is highest around the holiday season. There is also data noise. When you’re racing just to ship, nobody has time to reconcile deductions line by line, so they pile up as “cost of doing business,” Allen said.

But for marketplace sellers, there is also a rise in fraud on the consumer end with customers often using chargebacks as a convenience refund button, which spikes after the holidays. Retail e-commerce chargebacks grew by 233% between the first and third quarters of 2025, according to a report from Chain Store Age.

A recent report from Sift, an artificial intelligence (AI) fraud prevention company, indicated that 10% of consumers surveyed admitted they tried to return used or worn clothing by filing chargebacks for purchases they were not satisfied with. Sift also reports that increased transactions made without a card create more opportunities for legitimate and fraudulent chargebacks. Clothing and accessories are the most disputed category for chargebacks at 20%, followed by digital subscriptions at 18% and home goods at 16%.

Allen said suppliers that sell through retail and direct-to-consumer are getting hit on both sides. He uses a fictional snack brand as an example to illustrate how detrimental chargebacks can be at this time of year. Allen said a snack brand worth $150 million could expect a huge fourth quarter in sales revenue.

Holiday shipments to big-box, club and grocery retailers amount to $40 million in revenue, and e-commerce and marketplace sales are about $10 million. Allen said the $50 million in revenue looks great, but underneath there are trade allowances and promotional deductions that cost $5 million, compliance and OTIF deductions could offset revenue by $1 million, miscellaneous deductions offset revenue by $500,000, and the chargebacks from e-commerce refunds and fraud are another $500,000 reduction.

Allen said even if the supplier can prevent some of the $7 million in chargebacks, most will still leave around $1 million on the table in a single quarter. He said it can make or break a small company.

Minnesota-based snack brand Smackin’ got into Walmart stores at its Open Call event in 2024 and has since grown its distribution network to include Target, Dick’s Sporting Goods, Love’s and Albertsons. The seed-snack company was founded in 2019. Co-founder and co-CEO Brian Waddick recently noted on social media that the company almost went bankrupt because of its first retail deal.

“We didn’t understand the cost of being on the shelf,” Waddick said. “I learned that slotting fees, promotional spend, free fills, freight and deductions do not show up slowly as they tend to hit all at once. Like many early CPG founders, we assumed that landing a retail partner meant we had ‘made it.’”

He said getting to the shelf is not the finish line, noting that it is a complex financial environment that requires careful planning, strong operations and constant attention to detail.

“What kept us moving forward wasn’t an immediate jump in velocity; it was discipline,” Waddick noted. “We tightened our forecasts, improved our margins, simplified our SKU strategy, and used our experience as fuel for our next opportunity. Retail can absolutely help elevate your brand, but it can also strain your infrastructure and cash position if the fundamentals are not solid. The takeaway for anyone building a consumer brand is simple: Never confuse opportunity with profitability.”

Allen’s advice for suppliers is to treat deductions like a real-time key performance indicator, not a mess at the end of the month. He said it’s important to pull weekly or even daily deduction reports from portals, then create a simple dashboard on the top retailers, top deduction codes and rolling four-week trends. The supplier should flag anything spiking faster than sales growth.

“If your holiday sales are up 4%, but deductions from a specific customer are up 20%, you have a story to investigate,” Allen said.

He said it’s important to prioritize big claims into fixable buckets because it’s impossible to chase every $25 chargeback. Some of the best places to look are for high-dollar pricing against cost-difference issues, obvious duplicates and repetition in promo-related deductions.

“Many CPG brands find that 10-20% of deductions are invalid, but untouchable because the team is buried in everything else,” Allen said.

He said companies should also tighten their documentation before they ship the goods to ensure trade and promotional forms are organized and easy to pull. The pricing data must be aligned across customer, distributor and internal systems. Warehouse and logistics teams need to be briefed on routing guides, lead times, and on-time, in-full delivery expectations. Allen said cross-functional team planning and meetings are crucial to head off deductions when they hit.

“Deductions sit in the gray space between departments,” he said. “If sales thinks finance owns it and finance thinks operations caused it, nobody truly owns anything. A single one-hour cross-functional huddle in early December can save you six figures of margin in January.”

He said one solution for smaller companies is to join with in-house or third-party partners to build a repeatable recovery engine, not just a one-time clean-up.

“Don’t let a great Q4 turn into a soft year,” Allen said. “It should feel like a win, not a margin mystery that you’re still trying to solve in April. Suppliers who are going to win are the ones treating deduction prevention with the same urgency as sales growth.”

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics, and is sponsored by HRG.