If there’s one necessary evil in the retail business, it’s markdowns. Promotional pricing is the number one weapon in the retailer’s war chest. It’s the quickest and easiest way to get a customer’s attention. And when inventory goes unsold, a markdown is almost always involved in the liquidation strategy.
But there’s a problem with permanent markdowns. They eat away at gross margins. They distract customers from full-price products that are performing well. And the steady flow of deeply discounted merchandise trains customers to wait until things go on sale.
The solution, so says conventional wisdom, is to use markdowns to your advantage. The idea is to turn the end-of-life product into a loss-leader. Use the deep discount to drive customers into the store, and hopefully they’ll buy a few things at full price while they’re there.
Macy’s has been celebrated for its move to bring its Backstage outlet concept into its mall stores. The struggling department store chain hopes that by branding its clearance section, it will bring more foot traffic into stores and gain market share against discounters like JC Penney. (Macy’s has also been stepping up its “Last Act” sections as part of the strategy). And other department stores have tried similar ideas, promoting their off-price brands to try to get customers’ attention. Nordstrom Rack, which has been expanding rapidly, is a prime example.
Entire companies have even popped up to help make it easier for brands and retailers manage their leftover inventory on to consignment stores and discounters. These marketplaces are being billed as the solution to the problem. But when you consider they rely on happy buyers to make money – perhaps even more so than they rely on happy sellers – you might get the sense that they’re not.
The problem with these creative solutions is that they’re band-aids. They’re answers to the symptoms, but they don’t address the real problem.
The real problem is that the retail industry at large has a massive deluge of excess inventory caused by poor planning.
Think about it. Your in-season assortment has to compete against your clearance section. Your stores have to compete against the discounters. Your unsold inventory goes to the discounters! It’s a vicious cycle that you can’t get out of with marketing.
All of these fixes are focused on the wrong thing. Creative marketing helps you get rid of the excess inventory, but it doesn’t stop it from accumulating in the first place.
In order to do this, you need to slow down the flood of excess inventory, and that starts with the buying process. The question you should be asking isn’t “what do we do with all this excess inventory?” It’s “why do we have all this excess inventory?”
Buyers need to do a better job of measuring customer demand before assortments are bought, rather than making an educated guess and leaving it to allocation. They should consider each location’s ability to sell each item, and calculate buy quantities based on that calculation. Using more sophisticated clustering methods and buy tailoring can help simplify the process.
When you match your buys to customer demand up front, you have a better idea of how inventory will be allocated. Each customer touchpoint gets the right quantity to match demand, and sell-through increases.
As a bonus, changing to this method helps you identify which items are being underbought as well.
To stop the bleeding, you need to get away from using markdowns as a crutch. You need to teach customers that if they wait for a sale, they’ll simply miss out. They need to know that if they see something they want in your store, they can’t just wait and pick it up cheaper at a discount store.
When you address the cause of the problem, rather than the symptoms, you become less reliant on markdowns and reverse the cycle.
So which problem is your markdown strategy trying to solve?