Risk is inherent in the fashion merchandising cycle. Fashion retail is driven by newness, fresh ideas, and statements. These pull customers in, inspire them, and drive relevance and a competitive edge for retailers. Take no risk and, in time, a brand and retailer’s relevance and sales will drop. Leading brands and retailers master the art of managing this risk using data, metrics, forecasting, and a robust process.
When strategic calls on seasonal merchandise don’t play out as intended there is a need to clear the slow selling inventory. This clearing is most often facilitated by a markdown event, reducing the selling price to boost the rates of sale at the expense of margin but making way for the new assortments.
Getting this right has massive implications for profitability and inventory turn.
Here are the major high-level key considerations to help you own your next markdown.
Decide on an ideal sell-through metrics per week to hit your inventory turn target
You can’t manage what you can’t measure…accurately. Get the metrics right.
Depending on your inventory turn targets you will have specific rate of sale targets for each SKU and category of product. Therefore you need to have laser-focused metrics to measure style and category inventory levels, sell-throughs, margins, and turnover growth.
Metrics are not always a case of more is more, sometimes less can be more. Creating clarity behind the right metrics to use to manage markdown identification and percentage discount is critical. Empowering the business with a sell-through metric, preferably at a weekly level, is a great way to create a common SKU and category performance language across the organisation.
Set your seasonal markdowns a year in advance based on previous demand periods
Each retailer has a specific calendar to which their customers shop to. Think of the annual cycle of a business that services the gifting market, or back to school and you can see how these will move to very different drum beats.
Fashion tends to the more traditional seasonal cycle but nuances like religious holidays and family holidays are big-demand events. As a result, it’s important to set your seasonal markdown events in the calendar ahead of time so you can ensure you time the price reductions right.
It’s also important to watch the competition to ensure you’re aware of their cycles and can plan accordingly.
End-of-season markdowns are critical to get right. Markdown too early and you lose margin Markdown too late and you miss the sales and don’t clear the stock.
To manage this optimally you need to review previous years’ high-demand periods and subsequent markdowns and create the optimal markdown plan for the season ahead.
Calculate the percentage reduction against the selling rate to prevent margin erosion
Not all bad sellers are equal. Each style or SKU in the business will sell at varying rates of sale. Even those that are selling slowly won’t all be selling uniformly. Some will be selling faster than others.
To preserve as much margin as possible you must review each on a style-by-style basis and decide what the optimal reduction is.
This is an opportunity to get statistical and use the previously mentioned weekly rate of sale metrics to decide on the minimum reduction that maintains the inventory turn targets. By optimising the percentage reduction you can lift rates of sale and limit the reduction of margin by percentage points which when added up can result in significant profit protection.
Sales Canibalisation: Markdown according to assortments & ranges
No SKUs, products, or categories are sold in isolation. They all form part of an in-store experience of an assortment.
Having two similar products in store at the same time will inevitably cause the customers to choose which one they prefer and will impact the rate of sale of both. The same applies when launching a markdown.
Markdown selections must be made with a view of the complete range in store and that which is coming into stores during the style lifecycle. If there are any further drops of an SKU or product or there is a second input of a strategic trend, like printed men’s swim shorts, you should consider removing the current products from the set of markdown products so as not to impact the rate of sale of the new range coming into stores next.
Use markdown trends to drive future merchandise decisions
Ultimately, markdowns are an important learning event for the merchandise team. Customers are communicating with us through their purchases. A sale is a thumbs up.
Markdowns are a time to review the products that customers have given a thumbs down. It’s just as critical if not more so to isolate and identify those designs, colours, silhouettes, and prints that customers are saying no to and to respond as close to real-time as possible in changing future on-order products which can still be changed. Hence, they incorporate the elements of the best sellers and none of those of the bad sellers. These are trends driving markdowns.
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