In Defense of The Aggressive Markdown

In the fast-turning world of fashion retailing, aggressive markdowns are a standard practice.  Merchants and planners carefully monitor an item’s early sales and adjust its markdown schedule quickly if sales are not reaching expected targets.  Aging fashion loses value at a multiplying rate.  The great summer top in May that isn’t selling well by June is not going to sell any better in July and August when back-to-school merchandise arrives.  Fickle buyers either agree that the garment is a value at its starting price point or they don’t.  Sort of like a reverse auction.

Smart retailers who manage their cash flow well, know that the depleting value of the aging stock is eroding their inventory investment.  They want to maximize their return as quickly as possible to get that cash back and invested in other new fashions which will hopefully sell at full price.  That is why aggressive markdown schedules that fly from full price to 75% off in 10 weeks are common.

While your retail business may not be as fast-paced as fashion, it is important to use the same markdown discipline in every form of retail to optimize your inventory investments, maintain positive cash flow and keep your capital productive.  (With the possible exception of consignment retail.)  I often work with hardlines buyers of traditionally evergreen product (think of hand tools, sporting goods and auto parts) who refuse to mark down durable goods because the goods are still in the same condition as when they arrived.  In other words, because the goods themselves are not flawed or tarnished, they continue to hold on to the belief that their customers will find value in them at full price. Despite months – or even years- of their customers telling them differently!

What they fail to recognize is that in tying up their capital dollars in this “non-working” inventory, they have less money to purchase new, exciting products that customers might actually want. Stores become stale as assortments stagnate and customers find fewer reasons to come into the store, because they believe they know what they will find and there is nothing new to see.  As customers prolong their returns to the store, sales slow and even good selling items begin to lag.  The self-fulfilling prophecy of slow turning goods slowly grinds sales to a halt.  I know it sounds dramatic, but that is, in effect, the problem with an inefficient markdown process.

Some retailers who do not understand the full picture, convince themselves that their inventory is worth “full value” and as long as they do not write off the clearance markdowns. They believe that are still cash positive.  In fact, they will find more and more non-working inventory building up in stores.  The stranded inventory becomes a merchandising issue as store operators continue to try to market products that customers no longer want.  Savvy merchants know that a certain percentage of their product must sell at a marked down price to keep their assortments fresh and provide relevancy to their customers.  Matching sales rates to the markdown plans in a disciplined manner will quickly make issues in buying and forecasting visible so that steps can be taken to make better buys up front.

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