(Having trouble with assortment creep? Contact me, I can help!)

Naturally all of us would like to sell everyone that shows interest in our products.  After all, that is exactly why we are in business in the first place. In the retail business, trying to sell everyone that comes into your store or finds you on the Web would be unrealistic and you most likely would go broke trying.

The old saying, “you can’t be everything to everybody” comes to mind. All good retailers have an identity or image and target a certain demographic of likely customers to market to. You certainly wouldn’t go into a store specializing in work boots looking for water sandals just as you wouldn’t expect to find cowboy boots in an outdoor store. Even the broadest assortment that might be found in an outdoor store carrying many different departments is governed to a certain extent by consumer demographics, size of store, or even the financial strength of the owner.

Stores that attempt to please everybody so as to not miss a sale, over time end up with a condition I refer to as “assortment creep”.  The symptoms are easy to spot; lots of random inventory, duplications, broken sizes on popular styles, markdown opportunities from past seasons that may have been missed. In other words, a whole lot of nothing! This is difficult to spot on paper or by just reviewing inventory reports.  You may observe that the stock levels are over plan, but sales are slipping for no obvious reason.

One solution I often share with clients who are struggling with this problem is the creation of a “model stock”.  The easiest way to picture this is by starting from scratch. Assume you are opening a new location or you have nothing at all in the particular category.  In the perfect world, you would map out exactly the way this should look. What lines you wish to carry, how many styles, what sizes and colors, a varied assortment of price points, etc. Next, you will need to extend out the dollars and see how much you have at retail and compare this number to your open-to-buy plan. If you are way over or short, you may have to adjust the model by adding or deleting. Congratulations, you have just completed step one of your assortment plan.

Step two is to compare your “model” to what you currently have. This is where the process gets interesting. You will find that over time, you have added lines that perhaps now are not important. You might find that you have been filling into styles that once valid, are now slow turning and may no longer be relevant. You might even discover that you have been ordering too many sizes that in reality end up on the sale rack or worse yet are carried over from year to year.  What your goal should be is simply to put your inventory back into balance. In essence, this process is much like rebalancing your stock portfolio or 401k.

Once you have determined where the holes in your plan exist, it is now time to correct the problem. This is the final step in the process. Now that you have identified items that are not part of your model plan, mark them down immediately and turn them into cash. Use the funds generated by the cleanup to reorder the sizes that may be missing from the key styles that you wish to go forward with.

Creating model stocks works very well with almost every category of merchandise that has the ability to be reordered or filled into. Try this concept if you find yourself suffering from assortment creep. You will be surprised how many fewer customers walk out empty handed.

(Are you Wishin’ and Hopin’ for a profitable year?…If this is you, read on then call me, I can help) 

If you are of the age that you can claim one-time ownership of a transistor radio, then you might just remember the song Wishin’ And Hopin’.  I recently heard this tune while listening to the “oldies” station on my car radio. Ironically, I had just finished speaking with a retailer who had used the exact same words as we discussed his merchandising strategy and year-end outlook.  The coincidence really struck me.

Dusty Springfield’s catchy tune reached #6 on the pop charts in 1964. Though Wishin’ And Hopin’ (W&H going forward), is much better suited for a song title than a business strategy, I still encounter many retailers who either fail to plan or who don’t effectively implement or execute their plan.  These retailers end up with W&H results, sometimes it works out, most of the time it doesn’t.

Let me lay out what I mean by the W&H strategy. The W&H retailer typically buys merchandise with no clear thought of how it might fit into the existing assortment. New arrivals are distributed among stores in a predetermined order and are seldom if ever transferred to balance the assortment. This ultimately leads to missed sales opportunities in some stores, while potentially creating unnecessary margin problems in others. In-season markdowns are not addressed in a timely fashion and fill-in orders are hit and miss. Promotional merchandise is not sought out regularly which would help the store build volume and margin. The W&H retailer probably doesn’t have solid marketing strategy either. Other typical traits might include not paying attention to freight costs, current market rates on leases, employee selling expenses and inventory shrinkage.

“Ready, Fire, Aim”

At RMSA, we see this scenario all too often. The W&H merchant enters each new season full of optimism, yet is often left disappointed at season end.  The retailer is unprepared to deal with day-to-day reality due to inadequate tools, poor training, lack of time, or insufficient man-power.  You can recognize this merchant by his “Ready, Fire, Aim” approach to most problems. This is management by crisis because the day is dominated by the urgent, never leaving time for the important.  In other words, valuable time is spent putting out small fires while the big blaze continues to burn out of control. Because of these and other problems, the W&H store is left wishin’ for a different outcome than it experienced in the past. Wishin’ customers will like the selections he or she has made and hopin’ that the store will be profitable at year end. This really isn’t much different than playing the lottery. Most of the time, you end up with the same results.

W&H is a reactive strategy, not a proactive one. A goal without a plan to achieve it is nothing more than a wish, and “hope” is not a strategy at all. Many times this retailer ends up with little or no profit season after season and year after year, barely staying afloat, and not growing or improving. The vendors and the landlords are the ones making the most money in this case, unfortunately…. not you.  In some cases, you are simply buying yourself a job!

There is still time left this year

If the W&H strategy sounds all too familiar, there are still things you can do now to prepare for next year. Make plans now to make sure that all old merchandise is discounted so that it will be gone by the end of December. See that seasonal classifications (i.e. winter footwear, gloves, hats, etc.) have manageable stock levels going into season end. If you haven’t already, take markdowns NOW on styles, sizes and colors not performing as they should. If you have OTB to spend for opportunistic buys (i.e. Off-price), contact key vendors to see what might be available to freshen the presentation during the transition period between now and the arrival of spring goods. Review your spring on-order once again to make sure all bases are covered and that you are not over extended. If business is good, pay off credit cards and attempt to reduce lines of credit. Review operating expenses and make adjustments if out of line with industry benchmarks. Review marketing strategies, including email blasts and social media, for effectiveness.

Make an effort on the items mentioned above and you won’t have to go through next year Wishin’ and Hopin’ for higher profits.

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(If you struggle with overbuying or overassortment, I can help. Contact me at Ritchie@write4retail.com)

 

Have you ever been in a situation where you pulled up to a stop light to discover that you will be spending the next two minutes of your life emotionally involved with an individual holding a sign that depicts the life challenges he or she is struggling with? The signs typically read something like, “homeless, please help,” or “hungry and out of work” or anything designed to get you to roll down the window and part with some of your hard earned cash.

You have options to consider during these very lengthy seconds.  One is, you can do your best to avoid eye contact altogether.  This is nearly impossible when the poor soul is standing a mere three feet from your driver’s side door. You can stare back in defiance wishing this societal blight wasn’t tolerated in your city. After all, you work hard for your money, you know there are jobs available and this guy is just looking for a handout. The most popular option, however, is to succumb to whatever guilt you are feeling, roll down the window and hand over the spare change or couple of bucks you can quickly grab from your wallet. There you go. This small problem goes away (for now). You have a temporary reprieve from guilt and you have “helped” someone less fortunate. But you really haven’t helped anyone, have you?  You did this for yourself so you would no longer feel uncomfortable.

When I visit stores that are over-assorted and overstocked I know the store’s buyer(s) have struggled with the same feelings as the person at the stop light. They either can’t follow their merchandise plan or don’t have a solid plan to begin with. What generally ends up happening is they roll down the window (figuratively) and throw little token orders to lots of vendors. They assume this will make all the reps like them and everybody will be happy.

Buying a little from everybody simply because someone has taken the time to show you a line or come into your store is really like rolling down the window and handing the guy on the curb a few dollars.  It does nothing to help either party! The vendors are the ones holding the signs that say “Please buy my line.”  You don’t want to make them feel bad so you give them an order. The ramifications of this practice are costly to your store and to the vendor. You mean nothing to the resource and they mean nothing to you. A line can’t be properly represented and developed in this fashion. The merchandise that you really wouldn’t have purchased in the first place probably doesn’t fit into your assortment plan and most likely is a duplication of something already carried.  The merchandise becomes “lost in the sauce,” ties up floor space and cash, slows your turnover and eventually reduces your margin when you wake up and mark it down. You are way better off to skip the line all together than to write token orders for the wrong reasons.

A seasoned merchant will avoid this situation by having a solid dollar control plan and a resource matrix that is consistent with the store’s image. This is not to say that new lines shouldn’t be continually tested. To the contrary, testing a concept, new vendor, or different price point is something that may develop into a viable business opportunity. We always want to reserve open-to-buy dollars available for these occasions.

Remember, it is more prudent to say NO sometimes than it is to say YES every time. Your job as a buyer is to select the merchandise that best represents what your customers will most likely be willing to purchase in line with the image of your store.  You will sell more with a focused presentation and avoid assortment creep if you Buy the Best and Pass the Rest!

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I mean REALLY work?

 

IF your open-to-buy plan IS working for you:

  • cash flow stays fluid in up and down sales cycles
  • inventory stays in balance so that sales aren’t missed
  • you know EXACTLY how much to buy, when to receive it, and when to mark it down.

IF it DOESN’T work…it’s all a big guessing game and the results are based on how well you guessed. Sometimes you win….and often you lose!

 

You Lose if:

  • top line revenue (sales) isn’t increasing.
  • margins are eroding
  • markdowns are increasing
  • inventory levels are increasing and not supporting sales
  • stocks are out of balance resulting in missed sales
  • you really don’t know how much you should be buying
  • you don’t properly monitor timing of receipts
  • you don’t know when or how much to markdown

Contact me to discuss your store’s OTB today!

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(If you experience persistent problems with cash flow, I may be able to help you. Contact me through this website.)

 

As a retailer, what is more important to you, profits or cash flow? The initial response from most merchants posed that question is: “Profits, of course!”

On the surface, that answer makes sense; who wouldn’t want more profits? The mere word “profitable” itself evokes a sense of financial well-being. In today’s retail environment, though, profits alone are not enough; cash flow is the new financial reality.

I have reviewed countless profit and loss statements that showed extremely strong gross margin figures, only to find out that the store had no cash. Since accounting does not factor in the element of time, turnover does not appear on a profit and loss statement. Therefore, the financial picture created by a “profitable” business with poor cash flow can be a false reality.

Recently, a client came to us for a strategy to deal with a bank request. The bank wanted the retailer to produce an additional $200,000 in cash, not profits – cash. If you were given a similar mandate, what would you do? Well, hope is not a strategy and crying is not an option. To paraphrase Tom Hanks’ famous line about baseball from the film, “A League of Their Own,” There is no crying in retail. Three more practical solutions quickly come to mind: Cut expenses, increase sales or cut inventory. Let’s examine all three.

 

Option: Cutting Expenses

Putting excess expenses on the chopping block is an obvious first step to save some cash. The problem here is that most retailers feel they have already trimmed expenses to the bone. If you have recently renegotiated your leases, reviewed payroll costs, and scrutinized the remaining administrative costs, there may not be much left to cut.

Slashing costs too deeply can actually have a negative effect on business. Several “big box” retailers have experienced this recently as sales have been undermined by deep cuts in staffing and training. Prudence and caution are priorities when examining expenses.

 

Option: Increase Sales

Increasing sales sounds like a viable option, but how? You can promote more, but you might experience a margin hit which will most certainly raise a banker’s eyebrows. You could buy more inventory, which might drive volume, but the risk is that the cash problem could worsen if the additional stock does not perform as it should. You could advertise more, but that would only increase expenses if the ad campaign didn’t pull enough customers in.

 

Option: Cut Inventory

The third option is to cut inventory. Cleaning out excess stock will generate more cash in the short term. The dilemma, however, is how to consistently build cash over the long term. I prefer the scalpel approach as opposed to the meat cleaver method. Anybody can slash and burn inventory and generate quick cash, but the aftermath of kneejerk business decisions can haunt you for months to come. This is the very reason that I object so strongly to the marketing strategy of 20% off everything in the store, or what is often referred to as “the lazy man’s markdown.”

This promotional approach does little to solve merchandising problems, since the desirable items that could have sold at full price are the first to sell at discounted prices. Aside from a momentary bump in cash, the downside is reduced margins and broken size runs. Worst of all, the problem inventory is still a problem.

 

A Better Answer

Strategic planning is the answer. This means bottom up dollar merchandise planning at the store and class level. Most often a retailer’s line of credit (LoC) is tied to inventory. A banker’s valuation of inventory is what he thinks he can liquidate it for given the outside chance that the bank ends up with the keys to the store.

Because of the way bankers perceive the value of inventory, they get nervous whenever the word “cutting” is mentioned. Understand that to a banker, goods that are a year or two old have the same value as merchandise that was received yesterday. In most cases (although not all), what the banker  sees with regard to your inventory is only numbers on a financial statement. Given their reference point, it is understandable, though not always justifiable, why a lending institution might require more collateral when stock levels are reduced. For that reason, it is paramount that you keep the communication channels wide open with the bank if you depend on them for your LoC. Demonstrate to bankers, using sales and inventory reports, that fresh, “balanced” inventory has a better chance of increasing sales than simply having more inventory. It is also a good idea to have your banker visit your store and even attend a management or buying meeting. Treat the banker as part of your management team.

Anyone working in the retail business longer than a week knows the positive effect that new products can have on sales when received at the proper time. Customers don’t visit your store to see what came in last year. It is the constant flow of fresh inventory that drives profitable sales. A strategic merchandise plan that blends inventory balance with properly scheduled deliveries, and timely markdowns, is the pathway to faster turnover, which drives sales volume.

There are few problems in retail that can’t be remedied by increasing sales and cash flow. Hence, my new retail math formula: Cash Flow + Sales Increases = No Problems!

(Too many markdowns? Too much carryover merchandise tying up needed cash?  Contact me, I can help) 

No single question has been posed to me more often.  Retailers of all types always seem to question whether they would be financially better off to markdown and clear out remaining past season inventory or carry it over for the same season next year. In the shoe industry, this topic arises twice a year, in late summer at the end of sandal season and in late winter/early spring when boot sales are winding down.

Outlining the argument

The argument for carryover generally involves a merchant not wanting to heavily discount products that he or she feels will have to be repurchased next year. These products will be, in most cases, the same styles, colors, as the previous year. Prices may be higher which provides the retailer a chance to even mark- UP the existing stock to reflect current retail prices, therefore generating perhaps even more gross margin dollars than the previous year.

The case for clearing out seasonal merchandise is structured around generating cash flow from goods that did not sell during the period for which they were intended.  Open-to-buy for the category is not compromised by trying to “buy around” past season’s carryover.  Colors sometimes do change, styles often are updated, boxes do get worn, merchandise tags can become frayed and discolored, not to mention ancillary expenses such as taxes and insurance that will be incurred… on old inventory.

Considerations

Perhaps the first question you must ask yourself is why is there extra inventory in the first place? In the case of the winter of 2011/2012, warm weather precluded several retailers from selling as many boots, gloves, hats, and other cold-weather items as they may have sold during a “normal” winter.  Was this the entire story or a symptom of a bigger problem such a poorly designed merchandise plan or worse yet, no plan?  Another consideration would be to evaluate your current cash needs.  Ask yourself this question, “Do I want the cash from this inventory now, or can I afford to sit on it in my backroom for six months and hope I sell it the next season?”  A good follow up question at this point might be, if you didn’t sell the particular item last season, why do you think demand will be any stronger next year? Will your customers notice or care that you are dragging out last year’s merchandise?

Look at the numbers 

Example A.

Sales of winter boots for the year are $100,000 with a gross margin of 48% or $48,000. The boot classification turns 2.5 times.  $100,000/2.5 turns=$40,000 Ave. inventory @ retail. $40,000 x 52 %( cost compliment of the GM) =$20,800 Ave. inventory @ cost. GMROI = $48,000/$20,800=$2.3 GMROI

Example B.

Sales of winter boots for the year are $100,000. Gross margin= 42% or $42,000. Turns are 4. $100,000/4=$25,000 ave. retail inventory. $25,000 x 58%=$14,500 ave. inventory @ cost.  GMROI=$=$2.9

 

In the illustration above, sales are the same for both examples. In example A), markdowns are nominal and inventory turnover for a seasonal class is slow.  Space doesn’t allow for a 12-month merchandise plan of this class to be viewed or you would see that more merchandise was carried over in the off months than would be optimal. Inventory actually sat on the shelves for nearly five months with no sales activity.  In example B) markdowns were taken throughout the season on slow-moving styles and end of season markdowns were more significant.  The result was $6000 less in gross margin dollars.  The faster turn came from the fact that inventory levels started building in Aug., peaked in Oct. and stock was virtually gone by March.  The end result is an increase in GMROI of 26%.

 

As a general  rule, it makes more sense to clean up seasonal offerings and buy fresh the next year. That said, your world won’t come crashing down and you won’t be viewed by your peers as a terrible retailer if you decide there are a few styles hither and yon that for whatever reason you feel you can’t part with.  What must be avoided at all costs, are backrooms crammed with seasonal carryover year after year, tying up needed cash, and choking off the ability to land fresh new products which we all know is the driving force behind increased sales.

If you have questions concerning  your inventory variance contact me at Ritchie @write4retail.com.

With the Holiday season behind us, now is a good time to review the past twelve months and evaluate both quantitatively and qualitatively the areas of you business that have worked well in addition to those areas that could stand improvement.

Most retailers take a physical inventory in conjunction with their fiscal year end.  Certainly this is a recommended practice from an accounting perspective.  From an operations standpoint, the benefits of a clean and thorough physical inventory are numerous. If for example, a physical count is taken once a year and the inventory levels in the computer are adjusted and “cleaned up” to reflect the recent count, logically speaking, there will be no time in the year when the inventory reports will ever be more accurate and up to date. One of the more significant reports to generate after the inventory is reconciled is the inventory variance report. Most point-of-sale systems have one. This report reveals the differences between the book and physical inventory.  Book inventory is what the computer says you have on a given date and physical inventory being what you just counted and actually have in the store.

In my dealings with independent merchants over the better part of the past three decades, I have found that most stores assume a very casual approach to inventory adjustment.  This runs the gambit from the nonchalant retailer who merely accepts the difference and moves on (what I refer to as the “oh well, it is what it is” approach), to the operation that looks into every missing sku in an effort to tighten up the operation and prevent further discrepancies.

Monitor at Both Levels

Book and physical inventory should be monitored at the store and classification level.  Several things can cause a disparity between these numbers.  Certainly if the previous year’s inventory was inaccurate, then even if this year’s count is spot on there could be a substantial difference.  Markdowns that were not properly recorded are another potential problem area to check into, assuming the store is operating under the retail method and markdowns are kept track of. Transfers between stores are where a multitude of problems tend to occur as well.  It is not uncommon to find one store showing shrinkage and another store coming up with an overage by the same amount.  The solution here is an obvious one…tighten up the transfer process. Discrepancies can also arise from goods being received into the wrong classifications when the merchandise arrives.  If purchase orders are filled out properly with correct department/class information, this too can be held to a minimum going forward.  Missing tickets and human error at the point of checkout is another cause of inventory variance.  I am continually reviewing classification information from independent merchants and almost always see a class described as “unknown” or “missing”.  I have seen extreme examples where sales in these classes can be some of the highest volume classes in the store.  Needless to say, there shouldn’t even be a classification in the store to track unknown or missing merchandise. In order to keep the merchandising information credible all sales must be put into a classification when sold.

Another area for shrinkage is theft, both internal and external.  Having said that, I can almost assure you that I will get emails from merchants who will claim they have never heard of this happening in their stores.  Remember, just because you aren’t aware of something doesn’t mean that it hasn’t or can’t happen.  There isn’t a retailer on the planet that hasn’t had some experience with theft with the possible exception of the new store that has been just open for one day and frankly, I wouldn’t bet on that scenario.

Set a Shrinkage Goal

A respectable shrinkage goal would be anything < 2%.  Inventory shrinkage is a component of cost of goods sold along with purchases, freight in, alterations, trade discounts earned and the difference between beginning and ending inventory.  So if a store’s year-end shrinkage is high, the COGS will be higher and the gross margin will be reduced accordingly.  Recently, I have suggested that several of my own clients begin using inventory shrinkage as one of the components of manager bonus programs in an effort to illuminate the importance of closely monitoring this area of potential loss.

In severe cases, inventory shrinkage can alter open-to-buy numbers thereby creating a potential shortage of inventory which could lead to missed sales, a #1 priority among merchants and most certainly an area to be avoided.

As you embark on the year-end introspective ritual of looking for areas of improvement, don’t overlook inventory variance. It just might be the difference between being profitable and being very profitable.

Contact me at Ritchie@write4retail.com with questions or comments.

Click on IMU video for a ”Prescriptions for Profit”  discussion on initial markup by my colleague Paul Erickson.

One question I am repeatedly asked by retailers is how to increase maintained margin.  Several answers readily come to mind, the most obvious being to avoid overbuying and therefore reduce the margin-eroding markdowns that accompany such a practice.  Another way of increasing maintained markup is to find ways to increase initial markup.

Let’s make sure we are all speaking the same language.  When I say initial markup, I am referring to the markup percentage placed on the goods when they are received from the manufacturer.  Maintained markup is what is left after taking into account the cost of the markdowns. Stated differently, maintained markup is the difference between net sales and the gross cost of the merchandise sold.  Gross margin is the difference between net sales and the net cost of the merchandise sold.  Total merchandise costs include the cost of the goods, freight inward, any workroom costs, and any adjustments for earned discounts. It is clearly a different number than maintained markup.

Initial Markups on the Rise

According to the 2006-07 Business Performance Report, initial markups for independent shoe retailers reached an all-time high in 2005 coming in at 56.8%.  This represents a 4.8 point increase since 2001.  My hunch is that the almost 5 point gain in five years is due to stores seeking out and taking advantage of off-price opportunities to combat the effects of discounters and increased operating expenses.  Whatever the reason, we can all agree that initial markups are on the rise… and it’s a good bet that they aren’t going to go down any time soon.

Having the correct initial markup is the cornerstone to achieving the desired maintained markup.  Have you ever wondered what the determining factors for initial markup are?  Why do we double the cost?  What does the term “keystone markup” mean and where did it originate? My quest into the origin of “keystone markup” did not yield any definitive answers.  One source at the National Retail Federation (NRF) seemed to think that there was an actual “markup key” in the early days of cash registers. This practice predated individually ticketed items and pricing was oftentimes handled at the point of sale. One expert thought the term began in the jewelry business. Another thought more closely follows the dictionary definition of the word which is a stone at the top of an arch that locks the other pieces in place.  I suppose this makes sense since 50% of a keystoned item is cost and the remaining half is markup. Regardless of origin, keystone pricing refers to a percentage markup applied to a products cost, although it is becoming an outdated term due to rising markups.

What Intial Markup Must Cover

In my work as a retail consultant, I continually ask retailers to define their initial markup.  The answers are quite interesting, and run the gambit from doubling the cost and adding $1 or $2 dollars to a multiplier of 2.2 or 2.3 as an example.  These answers over time have led me to the conclusion that most retailers truly can’t explain what initial markup was intended to cover.  There are three areas that IMU must satisfy: 1) desired net profit, 2) operating expenses, and 3) markdowns. Outlined below is a formula for determining initial markup given the objectives above.

IMU = (desired net profit % + operating expense % + markdown %)

100+ the markdown %

Example:  Let’s say that our net profit goal is 7%, operating expenses are 40% and markdowns are 18% of sales.  Given the formula above, the IMU% would have to be 55% to cover the markdowns, pay the overhead and still contribute 7% to the bottom line.  If the store average is say 52% on average, net profit would decrease to 3.4% right from the start given the example above. If you do the math, that is nearly a 50% reduction in profit.  To restate the message, initial markup is directly related to net profit.  You must begin with enough markup in the beginning in order to have to something left at the end.

It is a good practice for all stores to review pricing practices on a regular basis.  Competitive pressures, changes in operating expenses and availability of promotional goods all come into play when deciding on a markup goal.  Are you making markup decisions based on what a product will sell for OR what you paid for it?  One way to avoid falling into the trap of cost-based pricing can be done when buyers are at market.  The best time to determine what the actual selling price will be is at the time the order is written.  In my previous retail career, I would often have our buyers decide what they thought they could sell a certain item for prior to knowing the cost. Once we knew the cost, we would make a decision to buy or pass the item. Basing the retail price around the intrinsic value of the merchandise instead of it’s cost, helped us to increase our initial markup.  Perhaps this strategy would work for your store as well.

Click on the word “Markdowns”  below to view a Prescriptions for Profit video narrarated by my colleague Paul Erickson.

Markdowns

If you have any questions about your own markdowns please email me at Ritchie@write4retail.com

The word itself strikes fear in the hearts of most retailers. Call it by whatever term you wish, price adjustment, promotion, or just plain sale, the translation is the same and conjures up all sorts of negative emotions. The fact remains however that any reduction in the retail price is really a MARKDOWN.

Most folks in the retail business have an inherent distain for the very word. Taking too many markdowns represents failure in some area or another. Overbuying, duplication, poor timing of deliveries, bad assortment planning, are all recognized causes of markdowns. Excessive markdowns raise the cost of goods sold and result in a reduction in gross margin. When margin levels fall below those of operating expenses, the store has a net loss.

To more fully understand this retail nemesis, let’s uncover some truths about markdowns.

Truth #1

Markdowns are the tuition retailers must pay for the education they receive from their customers. A lot can be learned about how to buy and price merchandise from past mistakes. If you really want to know where you screwed up, carefully survey your markdown rack.

Truth #2

Since markdowns are a way of life as well as an important part of the retail business, it is important that a markdown plan be established. Base the markdown plan around the turnover goals of the company. For example, if your turnover goal is 3 times, it is important to make sure that stock is sold within a seventeen-week period.

Truth #3

Always explain the markdown to your customer. If you fail to inform your customer that the markdown is for a special buy, end of season clearance, weekend only promotion, etc. you risk customers not believing your prices and every sale turning into a mini auction.

Truth #4

Overbuying is the #1 cause of excessive markdowns. Stores don’t go out of business due to high markdowns. They go out of business because they can’t pay for their overbuying. If your turnover goal is 3 times, you should be careful not to buy more than you can sell within a four month time frame.

If you buy more than you can sell, you are predestined to experience either excessive markdowns and reduced margins, or slow turnover and poor cash flow. Faced with this option, it is always better to take the markdowns, clear the inventory and generate cash. I have never seen a store go out of business because turnover was too fast and cash flow was too strong…never! On the contrary, I have seen several stores go under with healthy gross margins on their profit and loss statement.

Truth #5

Most retailers have heard of and would agree with the axiom that the first markdown is the cheapest. What this really refers to is that the first price reduction is an effective one. A “cheap” markdown does not refer to a low percentage reduction that does not significantly generate increased sales. A markdown of 30% that moves merchandise is therefore “cheaper” than a 20% markdown that does not produce the desired results.

Truth #6

The price you paid has nothing to do with the markdown price. The customer does not care what you paid for the product, nor should you. When you get to this point in the sales cycle, your only concern is how quickly you can convert the inventory to cash. From time to time, I encounter stores that are reluctant, and in some cases even refuse, to mark anything below cost. I have never been able to understand the logic behind this thinking. I suppose the mindset is that money is being lost when in reality much more lost revenue is at stake by not getting cash out of slow selling stock and replacing it with new product. Worse yet is packing goods away in the back room and dragging them out again next year. Your cost is not relevant in a markdown pricing decision.

Truth #7

In most cases, it is a good practice to keep markdown merchandise at the back of the store. You want your customers exposed to new full price products at every opportunity. Exceptions to this would be storewide sale events or seasonal clearance time when a large majority of items are on sale.

Truth #8

Nurture your good customers who do not shop you on price alone. This is where added value comes into play. The cosmetics industry does a great job of this by offering gift with purchase items. Thank-you notes to good customers also go a long way in showing a customer that you value their patronage.

Understanding these truths and employing sound markdown management should help turn what to some is a negative part of the business into a positive.

If you have any questions or comments please email me at Ritchie@write4retail.com

(To Discuss your store’s Inventory Balance write to me at Ritchie @write4retail.com)

My suspicion is that few folks reading this article seldom, if ever ponder this issue.  Given that all merchants today are searching for alternative methods to grow top line revenue, inventory balance should not be overlooked.

Over the past few years, retailers have taken the scalpel to all but the most essential expenses, labored over methods to improve inventory turnover, scoured markets in search of new and unique products and relentlessly hounded vendors for promotional goods to boost margins. Merchants are quick to complain about late deliveries, product quality, unmotivated sales people, even weather conditions, yet I can’t recall a store wondering about the one thing they can readily control-the balance of the inventory in their stores.

Harmony & Proportion

Of the several definitions found for the word “balance”, the meaning that I find to be most apt is “to bring into harmony or proportion”.  Nothing functions at its best when out of balance.  When the steering wheel on your car vibrates at a certain speed, most likely your wheels are out of balance. Not addressing the issue results in an uncomfortable ride not to mention unnecessary tire wear which ultimately will cost you more money.  Golfers are reminded to stay “in balance” if they are to derive the maximum result from each swing. If you work too much, play too hard, drink or eat too much, have too much stress or do pretty much anything else to excess, your life can become out of balance as well. The consequences of an out of balance life run the gambit from possible physical and emotional issues to relationship and financial problems.

Balance is also important for a retail store.  It is impossible for sales volume to be maximized unless all classifications have the correct levels of inventory, the ideal mix of styles, a well thought out combination of vendors and a selection of price points from which the customer may choose.

Symptoms versus Causes

One of the more readily apparent symptoms of a store out of balance is the lack of overall sales growth.  The causes of the imbalance take some additional detective work to unveil.  Oftentimes, an out of balance operation can be disguised by financials that appear to be fine on the surface. A few months ago I spoke with a store whose overall merchandising statistics looked fairly healthy.  Store turnover was at or slightly above industry norms, initial and maintained markup numbers were acceptable and operating expenses appeared to be spot on.  The retailer’s concern was that for the third consecutive year volume had not grown; in fact it had slipped a few percentage points. I offered to review the classification sales data for the preceding year and within minutes the problem became obvious.  Two of the stores largest contributing classifications were turning much faster than the highest industry benchmarks. Sales in these classifications were outperforming the first of month retail inventory levels and potential sales were being missed.  The store was literally starving these important classes. You might be thinking that this should be obvious. The reason that it is not is due to the fact that most retailers are consumed with primarily looking at sales figures and any increase is a good increase no matter how it comes.  Four other categories were turning substantially slower than they should have been, thus tying up dollars that could be spent supporting the growth classes.

Monitor Activity Regularly

A plan was put in place to regularly monitor the sales activity and place reorders in a timely manner.  In the classes that were not performing up to par, the oldest merchandise became the target of the most aggressive markdowns followed by broken sizes, discontinued styles and colors, and vendors that the store had elected not to move forward with.  Underperforming lines were also eliminated from the assortment plan and the store’s merchants worked diligently to avoid duplications in future buying. What followed shortly thereafter was, not surprisingly, a very healthy increase in sales volume.

Since most retailers are often too close to the situation to see the best solution, it is usually a good practice to have a trained outsider review your class data and make recommendations.  Rarely is there a situation where bringing the harmony and proportion back to the inventory does not lead to increased sales and better cash flow.