Part 4 of the Dynamic Inventory Management Series presents the Five Golden Markdown Steps. This efficient markdown system has a considerable impact on profitability and cash flow because it greatly increases turns, improves gross margin, sales and cash flow.
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Part 3- Five “Golden Steps” to implementing
a successful and highly profitable markdown system.
Most retailers will agree that marking down slow moving, discontinued, or seasonal merchandise will cause customers to eventually purchase slow moving products. However, the process by which most home furnishings retailers execute their markdown strategy is inefficient.
First, “dog” merchandise is identified too slowly. Some retailers only recognize an item if it does not sell in three to six months, for example. By waiting this long, valuable floor space becomes stagnant and the opportunity cost of trying a different item in its place is missed.
Secondly, dog merchandise is not properly identified. Even if your store is small, you need an automated system to let you know which items are not moving. Retailers that rely on the feelings and memory of a trusted manager to supply this information, always miss items that should be marked down and may even discount items that should not be marked down. Proper systems tell the truth because they are unbiased.
Lastly, dog merchandise is typically marked down too steeply. Many stores slash prices at semiannual clearance sales. These are time consuming events that are massive margin eaters. Clearance sales are OK, but they should be conducted in accordance with an efficient markdown strategy whereby only the very oldest merchandise is sold at the largest discounts.
Measuring The Value Of An Efficient Markdown System
An efficient markdown system has a considerable impact on profitability and cash flow because it greatly improves GMROI.
It increases turns. Slow moving merchandise is identified quickly, discounted earlier, and sold faster.
It increases gross margin. Merchandise is discounted by a lesser amount in steps according to how old it is. Simply put, the older the merchandise, the bigger the markdown. By doing it this way, you will sell more merchandise at a higher mark.
It increases sales and cash flow. Because your dogs will be sold faster, funds will be made available to try new merchandise items that may become best sellers. Once your salespeople see this system in action, they will love it. They will have greater product selection and be able to offer deals to their clients more often.
Finally, one of the most overlooked benefits of an efficient markdown system is that it delivers free advertising. Retailers who implement this properly, spend less money on advertising, because they harness the power of “word of mouth”. When you give your customers unexpected discounts (not during a clearance sale) on “dogs”, they tell their friends and show off your products! Their friends will remember and visit you when they are in the market.
THE 5 Golden Steps
Markdown System Implementation
1. Choose a project lead. This is one of the most important jobs in your company, as it significantly improves merchandise flow. This task should be given to a highly responsible person who has proven that he or she can successfully complete tasks. If your inventory manager/buyer cannot perform in this area, he or she should be replaced.
2. Define your levels. To do this, you need to set inventory aging dates. Typically if you are at a good range of inventory to sales (15% - 20%), setting six levels every 60 days is a great place to start. Many companies however, will be more heavily inventoried due to the absence of a working markdown system. If this is your case, you should set the periods further out so that no more than 30% of your inventory is marked down at any one time. You will be able to tighten up the levels as you start seeing results and your inventory to sales ratio begins to fall. (This will occur provided you only buy new merchandise when you have a true open to buy).
3. Define your “Golden Actions”. Now that you have six markdown levels, you need to define what you will do at each level. Your actions should get progressively more aggressive, providing more incentive for customers to buy at each level. Be creative in your actions so that you can find what works best in your market. Here is an example of a markdown strategy that has worked for many furniture retailers:
Level 1: 60 days. Discount up to 10%. This is the last chance for the item.
Identify the merchandise. Check where it is displayed. Re-merchandise and move on the floor. Un-nail. Educate sales manager and salespeople.
Level 2: 120 days: Discount 20%. Educate your salespeople.
Level 3: 180 days: Discount 30%. Use in direct mailer. Spiff.
Level 4: 240 days: Discount 40%. Move to clearance center or as-is area.
Level 5: 300 days: Discount 50%. Clearance center. Put on web page in your clearance section. Include in your monthly e-newsletter to your client base.
Level 6: 360 days: Discount 60%. Put up a below cost sign. Use for a weekend draw prize. Promote old accessories with “free with purchase of” offer.
4. Perform your monthly duties. Each month, the above duties must be performed without exception, for all categories and vendors. To skip a month because you are too busy will cause the system to fail. Expect it to take more time at the beginning and expect it to get routine and easier as time goes on.
5. Execute, refine, and never stop! Execution is the key to success. About 20% of the people who try to implement this system are successful and 80% fail. If you are confident and committed to improvement you can be in this top 20% and your profit will follow. Refine your “Golden Actions”. Become a student of your business and find what works for you. If your periods are longer than 60 days, as your inventory drops, reduce the number of days to get the system moving faster. Make it fun and stay with it forever.
In conclusion, please remember that the system presented above is not a theory. It has been successfully executed in many of the most profitable furniture stores. Just do it. Believe and execute!
David McMahon is a Senior Business Consultant for PROFITsystems, Inc. PROFITsystems delivers a "Total Success System" through PROFIT professional, PROFITconsulting, PROFITgroups, PROFITuniversity, PROFITfreight, and PROFITservices. These business units offer best-practice solutions designed to maximize cash flow and profitability. Questions can be sent to David care of FURNITURE WORLD Magazine at davidm@furninfo.
David McMahon is a Certified Management Accountant and Consultant with PROFITconsulting, a Division of PROFITsystems. Questions about this article, or to request a similar analysis on your financial statements contact him at Davidm@furninfo.com or call 8oo-888-5565.
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