Fall 2014
Planning for Markdowns By Nicole Leinbach Reyhle

Approaching a dreaded yet necessary task for all retailers.

In every job there’s that dreaded responsibility that gets pushed aside, dismissed and too often ignored. In retail, that dreaded something is markdowns. Commonly considered a retailer’s worst enemy, markdowns can actually work to your advantage and help fuel your business for profit. The catch is understanding well in advance your markdown strategies for seasons ahead to help avoid a massive pile up of markdowns you never planned for. To help identify some of the best strategies to do this, we asked some leading industry experts to share their insight.

Cathy Wagner, founder RetailMAVENS, encouraged retailers to pay attention to their gut, as well as be mindful of what they’re ordering and how much.

“I always tell people that if you don’t love it, don’t buy it. That is a markdown waiting to happen. If you really love it and even want it for yourself — yet are worried that it is too expensive — then order it. Time and time again I find that an item like this will sell. Markdowns are avoided because you have spent your dollars on something that you believe in rather than some marginal items — such as items that you just ‘like’ versus ‘love.’ This can make all the difference in successful items versus non-successful ones,” Wagner said.

Furthermore, Wagner explained that how much of what you order is key.

“Look at what your sales are trending for the next six months and divide that number by two. Do not order more than that amount. If you do, you are practically guaranteed to have markdowns,” Wagner firmly suggested.

Wagner’s advice is smart, providing a clear yet easy example of how retailers can plan ahead for inventory to avoid markdowns. But what happens when a busy season is approaching — such as the holidays — and planning inventory isn’t quite as predictable? Wagner suggested identifying upfront how to promote and sell during seasonal or special events to help inventory move faster and in more volume.

“If you find an item that you are absolutely crazy about or know that a particular time of the year, such as the holidays, demands more volume, then don’t be afraid to commit to a scary large order. What’s key, however, is to make special and specific plans to sell those items,” Wagner explained.

Some ways to help do this may include planning an in-store event that is promoted above and beyond your normal store events or planning a strategic email marketing campaign that helps encourage customers to both come into your store or buy from you online. Additionally, you can create a special contest among your store employees around a specific vendor or item to help generate stronger sales among those particular items. Combined, these efforts can reduce your chance of markdowns and increase your chance of successful sales.

Identifying items you love and planning events in your store can certainly help get you on track with sales, but those details alone don’t always do the trick. One of the best ways to ensure you are managing your inventory well is by reviewing data.

“If you don’t thoroughly understand how your business is performing, what your cash flow is like and who your customers are, growing — or even just running — your business can be a real gamble,” explained Vaughan Rowsell, Vend CEO.

Vend, a point-of-sale company that helps independent retailers manage their inventory and customer loyalty, delivers software specifically designed for merchants to track, manage and review their inventory sales. Having organized sales data provided by a POS company like Vend is key in establishing a clear understanding of what is and is not selling in your store. Plus, and possibly even more importantly, POS systems offer retailers the chance to review the actual spending habits of their customers.

“Seasonal highs and lows are bound to take place and no matter what the mass market tells us, every retailer has their own pattern,” explained Georganne Bender, one half of the retail expert team and speaking duo Kizer & Bender.

With this in mind, consider what your markdowns have been in the past and what led up to them. Did you have a strategy in place that identified when you would mark down items and how long you would wait until you gave them another red slash?

The root cause of excessive markdowns can almost always be traced back to the lack of adequate pre-season planning, and in-season adjustments to those plans. Lack of adequate pre-season planning will ultimately lead to a crash and burn markdown scenario, however, effective pre-season planning will lead to markdown success. Just don’t forget to incorporate in-season adjustments based on selling trends, market data and customer analysis.

Markdowns in review

While there is a variety of ways markdowns should be approached, the key takeaway is to plan markdowns in advance to control your inventory, maintain strong sales and help keep stock at a balanced level. Additionally, never let markdowns become a dreaded task but instead remember that markdowns are simply part of retail.

“Markdowns are a normal and necessary part of all retail, so planning for markdowns is important. That being said, control and optimization of markdowns is essential to success. The real effect of a markdown is greater than it seems, as well. For example, when you take a 20 percent markdown on an item, it has a 25 percent negative effect on your income statement,” emphasized Evan Wise, Principle of Management One, a company dedicated entirely to helping retailers boost sales, increase cash flow and manage inventory.

Evans’ reminder to keep markdowns top of mind can help you plan ahead for the markdowns in your retail future. Additionally, consider the tips below:

• If inventory levels are low, then markdowns should be lower. If inventory levels are higher, then markdowns should be higher. Essentially, your total inventory levels should impact your total markdown levels, as well.

• Markdowns should help control inventory from rolling over into the next season — ideally being sold during the same season they were intended to. This means you should plan for markdowns as part of your season versus reluctantly lower their prices simply to “get them sold.”

• Planning ahead with an open-to-buy strategy/calendar is vital in balancing inventory and planning for markdowns. Using a POS system will help strengthen these efforts, and it’s encouraged to plan no less than six months out.

With a strategy in place, you just may begin to love the idea of markdowns as part of your selling strategy — and ultimately as part of how you gain sales success.

Nicole Leinbach Reyhle

Nicole Leinbach Reyhle is the founder and publisher of Retail Minded, as well as the co-founder of the Independent Retailer Conference. She is the author of "Retail 101: The Guide to Managing and Marketing Your Retail Business" from McGraw-Hill and writes a regular column for Forbes. Visit www.retailminded.com, or follow @RetailMinded on Twitter and Facebook.com/RetailMinded.

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