Retail Math: Effective Markdown Techniques: Planning Markdowns

This explains how to minimize markdowns and utilize markdowns as an effective merchandising tool.

 

We recommend printing off the course content reference guide via the button below to assist you in the Retail Math for a Profit: How to Think Like a Buyer courses. 

 

Retailing Terminology

  • Retailing is all the business activities involved in planning and procuring goods and services from vendors and pricing, positioning, presenting, packaging, promoting and ultimately selling those goods to the target consumer.
  • Merchandising is all the business activities involved in planning, creating, distributing and marketing merchandise assortments and classifications to the target consumer while reflecting the company image. There are different types of merchandising based on which link or level (i.e., fiber, textile, apparel/home furnishings companies, retail stores) in the supply chain the merchandising is housed.

 

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Objectives of Markdowns

Part 4: 4-1 Objectives of Markdowns

 

Introduction

 

The price on a retailer’s inventory or stock is in a constant state of flux and change. The retail price may increase due to a change in wholesale costs. That same retail price, however, is more likely to decrease in price due to consumer perceptions and demand, inadequate sales, seasonal fashion merchandise assortments that become obsolete, soiled and damaged merchandise, customer returns, weather conditions and many other factors. A reduction in the selling price of any merchandise is known as a markdown. Markdowns reflect the depreciation in the value of the merchandise and are an integral part of merchandising.

 

Some retailers think of markdowns as a curse. As previously discussed, markdowns are a type of reduction and must be subtracted from gross sales to determine net sales. However, markdowns are a fact of life for the retailer; and, the retailer should use them as a useful merchandising tool. Markdowns are planned as a percentage of each season’s planned sales and are allocated to specific months by estimating when and to what extent monthly markdowns are needed to sell merchandise. The planned amount of markdowns is not a goal, but a guide.

 

Although some retailers view markdowns as a necessary and unavoidable evil, astute retailers attempt to use markdowns as a means to further profit or insure cash flow. Therefore, a policy and action plan controlling the markdowns must be put into place by all retailers. Further, retailers must constantly monitor markdowns in order to make sure that these markdowns do not significantly exceed the allotted planned amount for markdowns in the seasonal plan. Markdowns for the retailer are calculated as a percentage of net sales and are expressed in terms of both dollars and percent.

 

Objectives of Markdowns

 

Markdowns are necessary a) in order to correct buyer errors in the selection of merchandise, b) as a management operational device to move inventory that is slow selling or has a poor turnover (i.e.,  the number of times during a given period that the average inventory is sold and replaced), and c) as a merchandising device to promote sales. These objectives are explained in detail in Part 4: 4-2.

Types of Markdowns

“The buying process is both a science and art. Therefore, the process is impacted by the buyer’s intuition. Even though technology aids the buyer in planning purchases, buyers have a difficult job of selecting the right merchandise at the right price and having it in stock in the right quantities and in the right place at the right time in order to meet customer expectations and demand. Nonetheless, customers are fickle, change their buying patterns or seek fresh, innovative product instead of the retailer’s carefully planned merchandise mix. Remember that retail buyers must purchase merchandise six to twelve months before it is delivered to the store for the peak selling season; therefore, the customer may have moved to newer trendy merchandise other than merchandise ordered in the market six months before….”

 

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Markdown Policies

Part 4: 4-3 Markdown Policies

 

Since markdowns are a part of day-to-day retail operations, the retailer must have designated procedures for the timing of reductions, recording markdowns, analysis of the markdown data, and plans regarding how the findings from the analysis will impact future store operations.

 

Retailers have traditionally implemented several markdown policies in order to control markdowns and use them in order to operate a more profitable business. Some of these concepts are listed below:

 

  • A valid relationship exists between a product and the time of the selling season in which it is reduced. For example, fashion merchandise changes rapidly. Therefore, markdowns cannot be postponed until the end of the selling season, especially if the retailer wants to sell the trendy merchandise when the customer is interested. Fashion merchandise does not improve with age.
  • The timing of markdowns is impacted by the type of store and channel of distribution.
  • The first markdown is usually the less costly to the retailer if the merchandise is reduced “deep” enough to immediately attract the target consumer.
  • The first markdown must be taken early enough in the selling season to assure that time is available for other markdowns on the goods later in the selling season.
  • The size of the markdown is based on the original retail price and the time of the reduction. However, retailers must be careful not to reduce too “deep” too soon. Ask the question: “What will the customer pay for the product at this time in the selling season?”
  • Markdowns should be taken in incremental dollar amounts. The first markdown is usually 25 % or ¼ off of the original retail price; the second markdown is usually 33 % and 1/3 % or 1/3 off of the original retail price, and the third markdown is usually 50 % or ½ of the retail price.

 

Another policy impacting the sales of reduced merchandise includes how the retailer houses the merchandise. Markdown merchandise should be organized, merchandised, and promoted like any other merchandise. Also, markdown merchandise should be separated from regular price merchandise. Clear signage designating the type of markdown is a silent selling tool that is often employed by the retailer.

 

As previously discussed, management develops policies and procedures for handling markdowns. Additionally, plans for the amount of markdown dollars are calculated when developing the merchandise plan. Plans for markdowns are a guide, not a goal; therefore, retailers attempt to minimize the amount of markdowns taken during any given selling season. Policies used by many retailers to attempt to minimize markdowns are discussed in the following segment.

Minimizing Markdowns

Part 4: 4-4 Minimizing  Markdowns

 

Since markdowns impact the retailer’s bottom line and directly affect store operations, astute retailers try to minimize the amount of markdowns taken at any given time. Therefore, research and constant vigilance regarding reasons for specific product markdowns are necessary.

 

First the retailer must identify the store’s target consumer segments and then determine what product these customers demand. Besides looking at previous markdowns and sales records, merchandisers must communicate with the consumer, read trade publications, listen to sales specialists who are always the “face” of the store to the consumer, and conduct consumer research. Then the “right merchandise” can be selected and bought for those consumer segments.

 

Additionally, if new merchandise is immediately inspected when it arrives into the store, poor quality garments may be returned to the manufacturer instead of being reduced. Also, when the merchandise arrives in the receiving room, personnel should notify the buyer of any shipment inaccuracies such as incorrect sizes, colors or styles. Frequently these incorrectly shipped items are returned to the vendor, since they will not fit into the retailer’s planned merchandise assortments.

 

Good housekeeping procedures will assist in keeping the stock clean and in saleable condition. Further, well planned merchandise arrangements and displaying of slow selling goods will promote the goods for regular price selling, thereby reducing markdowns.

 

Also, keeping accurate records and analyzing sales, major vendor resources and markdown classifications may assist the buyer in pinpointing problems with specific product classifications. Timely reorders may prevent stockouts, as well as the odd lots and broken sizes in product classifications that must be reduced. Developing key vendors allows the buyer to make special purchases and buy closeouts that may be mixed with regular price goods for a higher markup and extra store customer traffic.

 

Lastly, the retailer must be selective not only on the product group to be reduced but also on the timing of the markdown and the amount of the markdown, as previously discussed in Part 4:4-3). The markdown must reflect the saleable value of the product.

 

Markdowns are a merchandising tool and should be carefully planned with constant and consistent monitoring in the daily operations of the retailer. Minimizing markdowns impact the profit of the store and can be used to create more traffic in the store and a satisfied repeat customer.

Calculating Markdowns

“Since markdowns are a downward adjustment in retail selling price, they greatly impact inventory levels, sales volume, and profit. Therefore, retailers must meticulously monitor and accurately calculate markdowns to meet the sales plan and to realize adequate profit. In fact, inaccurate calculations of markdowns can actually cause inventory shrinkage. It is very important that statistical data reflects the day-to-day operations of the retail store…”

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