The Markdown Blues
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.
Published by Inc.com
Now that the holidays are behind us, the attention of many small retailers turns to that which is staring them in the face -- all of the left over merchandise that has to be marked down. Welcome to Clearance Season!
But the clearance season that small retailers should be focusing on right now is not the one that's going to last the next several months, as they clear out their remaining fall and winter merchandise. No, the clearance season that should most concern small retailers right now is the one next July and August, when they are clearing out their remaining spring and summer merchandise.
The fact is that at this point your fall and winter markdowns are going to be whatever they are going to be. You don't have a whole lot of control over how big a bite they're going to take out of your bottom line. But you do have control over your spring and summer markdowns, if you act now.
Let me illustrate. A while back I worked with a client who was staring at a mountain of markdowns, and had been every season for the last several years. He had watched his markdown percentage steadily climb, his margins melt away and cash flow become a recurring problem. It didn't take long to diagnose that his markdowns, the heavy inventory levels they represented, and resulting cash flow issues, were the result of mistakes made months earlier, when inventory was purchased without an adequate merchandise and buying plan in place.
In fact, as our discussion continued, it became clear that there was really very little planning being done at all. There was some financial budgeting taking place, but the detailed plans of what to buy, how much to buy, when to buy and when to have it in his stores simply didn't exist. His buyers were, in fact, doing little more than buying to the prior years' sales, shipping most of it into the stores early in the season, and then reacting to sales by buying even more to be sure they never ran out of the best items.
What exactly should a small retailer be planning? How should he or she go about preparing these plans? And what should he or she do with them once they are completed? Here are a few tips:
- Plan sales. In order to effectively manage your inventory, you need to know what you expect to sell. For larger retailers that are stocking many SKU's, sophisticated sales forecasting software may make sense. For many small retailers, however, developing a simple spreadsheet from your POS sales history, by month by key category, is most cost effective. Start with last years sales histories, and make adjustments for unusual events, such as weather, out of stocks, one-time promotions, etc. Then factor in the appropriate increase or decrease based on your current sales trend and your reading of the sales potential for the category for the upcoming season. Finally, for larger categories, it may make sense to break the sales plan down by sub-categories, styles or vendors.
- Plan inventories. It makes little sense to bring in more inventory at any given time than you need to set your displays, support your planned sales until the next vendor delivery, and provide a safety stock in the event of an unexpected sales spike or a late delivery. Committing to inventory too far in advance, and then bringing it in all in one shot is one of the surest ways to find yourself over-stocked down the road. For many small retailers, the best way to plan inventories is to plan to have enough on hand at month end to cover the next two or three months sales.
- Plan inventory receipts. If you've planned sales by month, and ending inventories by month, it's easy to calculate how much inventory to bring in each month. You need to bring in enough to cover that month's sales plan and ending inventory, less the prior months ending inventory. In this way, a buyer can know in January, when preparing for the spring season, for example, how much inventory to plan on bringing in each month of the season.
- Plan markdowns. Planning markdowns goes hand in hand with planning inventories. If you plan the date of the first seasonal markdown before the season even begins, you can plan the inventory you want to have on hand at that point in time, and thus your markdown percentage, as well as your markdown sales before your second markdown, as well as all subsequent markdowns.
- Plan dynamically. Once you've completed your preseason planning, don't put it in a drawer never to be seen again. Use that plan as a dynamic tool to track the progress of the season. As each week goes by, and sales trends begin to develop, adjust future sales plans accordingly, and adjust inventory plans for those updated sales plans. If sales are exceeding plan, you want to be sure you have the inventory to keep the momentum going. Conversely, if sales are coming up short of plan, the sooner you adjust your inventory plans, and thus your scheduled receipts, the less likely you are to end up with excess inventory that needs to be marked down at season's end.
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. It may seem that there's never enough time for such planning, as if it's a luxury that just can't be afforded, but in reality, it's a critical necessity, a vital investment in the financial health of any small retailer. And now is the time to get started.