A markdown is almost the most boring topic to talk about in retail. Almost. Busier promotional calendars from some of the globe’s biggest retailers, tough competition, shoppers comparing prices online, and a new wave of e-commerce companies make this one of the most interesting areas in retail right now.
The basic tenants of product markdowns haven’t change at all. Markdowns continue to be expensive lessons for retailers and buyers. Markdowns are a way to free up cash flow for new merchandise. The first markdown is always the best and most effective.
But, the way in which retailers are approaching markdowns is shifting.
A NECESSARY EVIL
Every article ever written on markdowns begins essentially the same way: “it’s a word that brings instant weariness to any retailer”. Most then indicate markdowns are a ‘necessary evil’. Then some try to put a positive spin on the act of reducing the value of your merchandise.
This is obvious and a bit silly. No one in the industry wants to devalue the product they have picked for their customer - a customer who has supported your store(s) year after year.
However, the tips and tricks included are good standbys:
- Place your markdowns at the back of the store, so your customer has had a chance to shop regular price merchandise first.
- Make your first markdown count. It should be deep enough to immediately drive up the rate of sale.
- Storewide promotions are twice a year, limit your promotions otherwise to clearing up duds. The customer is trained to shop at these sales only twice a year.
What these tips and tricks lack is the acknowledgement that the way large, dominant retailers has shifted. This is simultaneously altering the way the consumer is shopping as well.
Most of the world's biggest and best retailers love markdowns. They have found a way to use a large amount of in-season promotions to drive traffic and sales. In fact, each season’s strategy is not so much of a strategy any more, but resembles instead a promotional plan.
Take for example North America's oldest retailer, Hudson’s Bay. This retailer uses Bay Days and One Day Sales to purchase low cost, low quality, high volume product to drive a million dollars in sales per day. Combined with an extensive calendar outlining when each brand will appear in-flyer and in-store at 25-, 30-, 40- percent off, the myriad of direct mail coupons, monthly seniors days, and weekend events, the retailer is always on sale.
Branded retailers, like American Eagle, are also planning their promotions pre-season instead of using markdowns to only clear inventory at season's end. A simpler calendar is used in which merchandise is designed and bought for promotions throughout the year: 2 / $20 graphic tees, $25 denim events, etc.
In many cases, the ‘always on sale’ strategy is driving top line sales, and certainly traffic for these retailers. The margin pressure is also often significant. These companies are sometimes producing lower quality product to account for the reduction in retail price. High volume purchases are also part of the strategy, enabling the manufacturer to achieve economies of scale. And finally, as with Hudson’s Bay, the vendor base is quite literally paying for the margin shortfall that results from the promotional strategy.
This is a difficult strategy to compete with for any retailer with less than 50 stores.
At the other end, there are retailers refusing to participate in markdowns completely. Everlane andDollar Shave Club are both building strong business with this model. They are e-commerce companies, which inherently makes their operating margins lower. Both offer extremely limited assortments – some variation supporting a few core items. Both have a high value product and pricing strategy – offering essentially wholesale pricing to the consumer.
The key to their regular-price strategy, however, is scarcity of product. Everlane manufactures smaller quantities until demand requires otherwise.Vancouver’s own Aritzia built their business this way.
Zara, on the other hand, has significant breadth of merchandise, operates using retail pricing, and is a bricks and mortar retailer also has success with the scarcity model. Zara’s markdown rate fluctuates between 15 and 20 percent.
Product scarcity is not actually a markdown strategy as much as a way to avoid markdowns. It doesn’t just mean selling-out of product, and it certainly is not the Target-method of stocking shelves. Product scarcity means diligently measuring demand and having the system, procedures and partners in place to help you execute.
For smaller retailers this may mean simply having your best suppliers hold stock for you in-season.
There is also a customer psychology component. The customer needs to know and understand that the product is
- highly covetable and
- available for a limited time.
Communicating exclusivity, covetable product attributes, or limited timing, are essential components of product scarcity messaging.
Exclusive product is often too limited in quantity, sizing, and pricing. What do you do if your customer is unable to purchase the scarce product? Have alternatives on-hand that are easy purchases for your customer. For any item in limited quantities, platinum pricing, or advanced design elements, the alternatives will allow your customer to purchase/participate. And, of course, it allows you to make a sale.
To see markdowns in a new way, a mastery of the connection between consumer psychology, brand strength, and the commerce of markdowns is key. Deepen your understanding at the item and market level. The tools, content, and best-practice resources will enable a stronger strategy, from the first to the last markdown.
Course access is available for four (4) weeks from time of purchase.