by Doug Smith, President, The Woodhaven Group
Retailers every year take big risks and invest huge sums of cash in inventories in the hopes they have identified this season’s “hot” style wanted by consumers. These “hot” styles may be in fashion apparel, home furnishings, accessories, electronics, or even shoes.
Regardless of product, all types of merchandise share a few common traits. The inventory setting on the floor is usually paid for and at that point it is only worth what someone will pay the retailer for it. The goal is to have fast inventory turnover and put the cash back to work with a flow of new fresh exciting styles for the next season. The buyers who can correctly identify these trends are worth their weight in gold. However, in spite of how good the buyers are, a fact of life is that most merchandise is marked down and not sold at full price.
If an item does not move at full price the goal is to find the “right” price point and convert the merchandise into cash. The faster a retailer can do this the better will be their cash flow and overall return on investment.
There are 3 types of markdowns:
- Preseason promotions to beat competitors and, in some cases, to identify what the hot items will be.
- Promotional markdowns taken in season to support traditional store wide events or annual events like Christmas Sales.
- Clearance markdowns to liquidate remaining inventory
This last type of markdown, the clearance markdown, is where many retailers hurt their cash flow the most.
The reasons for clearance markdowns can range from simply buying the wrong styles to buying too much of a good item to buying a hot trend as it is ending.
There are strategies that can minimize the cash flow and profit impact of clearance markdowns:
- Don’t fall in love with the item. If you personally made the selection it is hard to admit you made a mistake and you possibly might be the only one who likes it. Take the markdown and forget about your pride.
- Don’t wait until some pre-ordained period to take the markdown. If you bought 10 of an item and not one sold after a reasonable period you need to get it marked down. The customer has spoken. The item will not get better.
- The first markdown is critical. Get the item to a price that will likely move it out the door. Some retailers have a fixed markdown pricing chart they follow. I don’t agree with that. Some items need to be priced deeper than what is on some chart.
- It is likely you have identified “magic” price points that move clearance items. Group various original price point items into these clearance price points and you will see inventory sell quicker.
- Many retailers refuse to markdown an item below what they paid for it. Forget that strategy. Even if the amount you receive is small you will be able to take those dollars and immediately invest it in fresh new merchandise that may sell at full price. You can then reinvest these new dollars in even more merchandise that could again sell at full price. However, none of this can happen if you stubbornly hold onto an item because you refuse to lower the price below cost.
- Remember this. Even an item marked down that sells adds to your total sales column. Until that happens it is just inventory….. that is probably overstated in value on your financial statement.
- Finally, a clearance markdown sale is a chance to reward your loyal customers who pay full price with an opportunity to get a bargain from your mistakes. It helps you and its a good deal for your customer. It’s another reason to keep them coming back into your store.
Don’t forget that buying mistakes will happen. The only sin is not acting quickly enough to convert those mistakes back into cash to continue to grow your business.