Faced with a boatload of inventory after a lackluster holiday? You’re not alone. Many retailers fell well short of sales plans that were fairly conservative to begin with.
That means the challenges from holiday 2007 are extending into this year during the final phase of the product life cycle: markdown and liquidation of unsold merchandise.
Our survey of multichannel merchants finds that most companies are sticking fairly closely to traditional liquidation strategies, namely clearance and sale promotions.
Marking down products that didn’t sell well is a good way to recoup some of your investment. But keep in mind that for a merchant working on a 54% gross margin, a 10% markdown would reduce gross margin by almost 5%.
So for catalogers with net operating profits ranging between 4% and 10%, exceeding a markdown plan can really hurt the bottom line.
What are the typical catalog sale strategies? Let’s look at the four key categories.
Traditional after-Christmas-sale digest book
All items are on clearance or discounted substantially. Entire categories (such as greeting cards) are often shown in the catalog, which seems to be a waste of expensive space. The company’s Website mirrors the sale catalog during this selling period.
“Hybrid” sale catalogs
Apparel merchants typically use this approach. These full-size books are promoted as a “sale event” on the cover, but the catalog combines offerings of sale prices on seasonal categories with full pages of regular priced, higher-margin basic merchandise.
Merchants using this strategy typically ensure that their Website layouts and featured items essentially mirror the print catalog, with equal emphasis on the after-Christmas sale and regular-priced merchandise.
Pre-Christmas sale events
A few catalogers showed some creativity this year by beginning their sale events roughly two weeks before Christmas — presumably a reflection of the difficult business climate. One example is Smith & Hawken, which mailed a digest-size, 36-page book to be in-home Dec.17.
Many companies also offered “last-minute gifts” during the last week before Christmas with good success.
The vast majority of merchants in our survey mailed out catalogs that reflected their Website home page at the time. And virtually all retailers used their Websites to promote off-price and sale merchandise.
But two merchants, Target and Pottery Barn, displayed an effective and differentiated approach by channel to post-Christmas clearance and liquidation.
Pottery Barn mailed out a 120-page catalog immediately after Christmas; the merchandising thrust emphasized new products for spring and bold, bright colors. A call-out at the bottom of the front cover announcing some sale pages at the back of the catalog.
But the layout and emphasis for Pottery Barn’s online store at the time of the catalog drop was the exact reverse: a hard-sell banner headline announcing “Winter Sale: Save up to 75% on select items.”
The sale pages in the print catalog were assorted to cover all major product categories, with messages on each page directing the customer to “more great items at potterybarn.com.”
This is a dramatic example of a company using channels to complement each other, rather than duplicating efforts. The merchant is using an expensive print catalog to sell higher-margin products and also build the Pottery Barn brand.
Simultaneously, an e-mail campaign — combined with sales pages in the print catalog — drives customers to the Pottery Barn Website that liquidates clearance and seasonal merchandise.
General merchandise giant Target was perhaps the first to “come clean” about soft sales with its announcement on Christmas Day that it would probably miss its December sales plan.
That same day, Target launched an e-mail campaign with a one-word title, “Clearance!” which promoted the storewide clearance sale with savings up to 50%.
But Target’s retail print circulars stuck to its proven strategy of promoting key volume drivers — such as DVDs and consumer staples — highlighting key price points rather than a percentage discount.
Components of a liquidation strategy
As noted earlier, a 10% markdown will result in a 5% reduction in gross margin where markups are close to keystone (50% markup). In companies with large proportions of basic and fashion-basic merchandise, sales in these programs will help offset higher markdowns in fashion items.
Our experience is that, overall, markdowns may represent 2% to 4% of net sales, at a minimum.
The chart “A look at liquidation strategies” on page 39 lists the 15 methods that companies use for in-season liquidation and clearance, with the positives and weaknesses of each. Several general caveats should be kept in mind when reviewing the chart:
PLANNING: Clearance strategies, by their very nature, inevitably involve a greater degree of reacting as opposed to long-term planning. Nonetheless, it’s still critical to plan an exit strategy for all items up front when making new product introductions. Ideally, this should entail some form of vendor assistance on program items with major suppliers as part of a seasonal business plan.
DISCIPLINE: You should approach markdown strategies with the same focus and intensity as a line review, particularly in planning post-holiday promotions. This approach is critical to hit both end-of-year inventory levels and your turnover and profitability goals.
BENCHMARKS: Your merchants must adhere to a “no sacred cows” standard in evaluating the year’s winners and losers. To maintain a dispassionate view when discontinuing items, merchandise managers should conduct these meetings as working sessions and participate in all decisions relating to clearance strategies.
TIMELINESS: Strive to liquidate merchandise as close to in-season as possible.
PRICING: Always remember that pricing is a demand science — not a function of markup formulas or what you would like to recover.
Generally, the saying, “your first markdown is your cheapest, make it your deepest” will prove to be the case. One important metric to consider will be sell-through percent and performance; the worst product “dogs” obviously should receive the deepest price reductions.
MEDIA: Consider the cost of the liquidation media used. With recent increases in both the cost of mailing and the price of paper, direct merchants need to consider whether a print catalog is cost effective — or even necessary — when selling merchandise at reduced prices and margins.
The choice of a clearance vehicle should generally correlate with the size of the product liability involved. As you move down the list of methods on our chart, it becomes clear that major product residues should be promoted in larger vehicles with greater reach.
As these merchandise liabilities are reduced and product sizes/SKUs become broken, smaller vehicles such as package inserts or employee sales can help flush out the final residues.
|Challenges in attaining best practices|
Aside from the discomfort inherent in having to face product failures and disappointments head on, merchants face several challenges when trying to meet the standards we’ve outlined for effective clearance merchandising. Chief among these:
LEAD TIMES: Planning a sale digest — or even sale pages and bindins — requires production lead times of at least three months, and often more. With consumers buying closer to need, it’s increasingly difficult to identify clearance items so far in advance, and harder yet to project their end-of-season inventory levels.
NEWNESS: The success of retailers such as Costco — and its “treasure hunt” approach to frequent product rotation — emphasizes the importance of offering consumers fresh product on a regular basis. With the duration of most holiday catalogs often exceeding four months (September-December) for many direct merchants, their customers are often hungry for new product introductions by the time Dec. 26 arrives.
Mailing a sale digest book can certainly help clear out overstocks. But the strategy leaves the promotional calendar stale, and risks tarnishing the cataloger’s brand.
PROFIT CONSTRAINTS: As we stated earlier, clearance pricing should be its own science. It has to be demand-based and aimed at hitting the price that will motivate your customers to buy, ultimately liquidating excess product. But in a difficult retail year, when many merchants have missed sales and margin plans, the “vicious circle” effect often prevents them from taking the aggressive markdowns necessary to sell merchandise.
In these cases, a meager price cut will reduce your stock only by the amount of the markdown — and your distribution center will still be stuck substantial overstocks.
Taken together, all of these challenges show the competitive disadvantages of using print media when executing clearance-merchandising strategies. Traditional sale digests are expensive — pricy to produce and extremely costly to mail. With marketing expenses for many catalogers averaging 30% of net sales or more, these clearance items will hurt profits once all expenses of the mailer are allocated.
And in a worst-case scenario, the products in a sale catalog may have unexpectedly sold out by the in-home date of the catalog, leading to disgruntled customers, wasted marketing expense, and foregone revenue.
|Moving forward in the multichannel age|
We have described in previous articles ways in which cross-channel merchandising strategies are evolving as the growth in e-commerce continues to accelerate. The merchant’s channels need to offer its customers a consistent shopping experience; however, “integrated” channels do not necessarily have to be identical.
Increasingly, successful multichannel merchants are using channels to complement each other in a variety of strategies and approaches.
Merchandise liquidation and clearance offers just such an opportunity.
In the Pottery Barn example cited earlier, the merchant mailed its print catalog — offering 90% new product and 10% clearance — on Dec. 28; its Website at the time emphasized its clearance sale with up to 75% savings. This cross-channel strategy offers several advantages.
For one, clearance merchandising is largely about reacting vs. the long-term planning associated with new-item development and product launches. Online merchandising, by its real-time nature, is more conducive to the process and constraints imposed when selecting, pricing, and promoting clearance items.
And once an item is marked down, the primary promotional component becomes price. While other product features — fabric, exclusivity, etc. — remain important and deserve emphasis, sales of such items will be driven either by a key price point and/or percent savings.
What’s more, given the need to “tell a story” and romance full-price merchandise (describing unique features, functions, etc.), reserve your expensive print catalog space to drive these high-margin categories, as opposed to off-price, lower-margin goods.
Remember that, ideally, there should be a correlation between large product liabilities and the reach of the vehicle selected to liquidate them.
You need a cross-channel merchandising strategy in which channels complement, rather than supplant, each other. At key “transition points” of the retail year, you will need to pursue aggressive clearance strategies simultaneously with new, regular price introductions.
Using alternate channels to achieve these objectives provides a coherent means of making such transitions effectively and more profitably than in the past.
Finally, direct merchants need to avoid the risk of any one channel being used exclusively to execute a specific strategy on an ongoing basis.
While customers expect to see Website promotions during December and January, the online store and e-mail promotions should never turn into a “bargain basement.”
Conversely, the print catalog will benefit from having sale pages that function as a “hook,” enticing the customer to view regular price offerings as well.
In this new realm of multichannel merchandising, channels will not compete for sales, but create synergies where varying strategies — both clearance and regular price — can be executed successfully.
Curt Barry is president of F. Curtis Barry & Co. (www.fcbco.com.), a multichannel operations and fulfillment consulting firm specializing in systems, warehouse, call center, inventory, and benchmarking.
|INTERNET/WEB (Includes eBay, e-mail, Amazon)||• Immediate, flexible
• Low cost
• Highly effective
• Not staff intensive
|• Can train customers to wait for items to go on sale
• Often need e-mail address
• Hard to match back the promotion that customers are responding to
|RELIST/REPEAT||• High response and cost recovery if item was a winner||• Repeating losing item is seldom productive
• Space better used for new item
|RETURN TO VENDOR||• Effective way to recover cost if re-orderable product||• May pay restocking fee
• Pay freight back
• Must negotiate up front
• Not exclusives or imports
|CLEARANCE CATALOG||• High response and cost recovery
• Opportunity to buy inventory to increase response and margins on winning items
|• Too expensive for small quantities of product; or broken, colors/size assortment
• Competes with regular catalogs
• Must be planned/designed
|BIND-IN CLEARANCE INSERTS||• Good response and cost recovery
• Easy to adjust circulation to inventory quantity
|• Competes with full-price items
• Can cheapen image for some catalogers
|PACKAGE INSERTS||• Easy to adjust circulation of small inventory quantities
• Low cost, easy to produce
• Co-op programs with other mailers can be a revenue source
|• Rate of clearance tied to number of outgoing packages|
|SALE PAGES||• High response and cost recovery||• Can’t adjust circulation to inventory quantity
• Competes with full-price items
• May cause image problems
|OUTLET STORES||• Good for moving damaged and defective goods
• Can open stores for selective dates or days
|• Hard for catalogers to manage and merchandise properly
• High fixed expense
• Can create nexus problems
|TELEPHONE SPECIALS||• Quick response to overstocks||• Difficult to train CSRs and set up and maintain effective system prompts
• Risk of offering item sale price when customer paid full price
|TELEPHONE SPECIALS (cross-sells)||• Some companies can add 3% to 5% to average order
• Degree of success is related to product and CSR training
|• Difficult to train CSRs and set up and maintain effective prompts|
|WAREHOUSE SALES||• Can move large quantities
• Good way to get rid of damaged and defective goods
|• Can disrupt normal operations
• Staffing, parking, POS, crowd control logistics can be tricky
|EMPLOYEES-ONLY SALES||• Major employee benefit
• Can be constant method in use
|• Cost recovery is low
• May not sell large quantities
• Remainders may not be first quality
|ROVING TENT SALES||• Move high number of units
• Good way to move damaged and defective goods
|• High expense
• Staffing, parking, POS, crowd control logistics
|CHARITABLE DONATIONS||• Provides some tax advantages
• Some merchants donate all damaged and defective goods
|• Low cost recovery|
|JOBBERS (undertakers)||• A way to clear out large quantities rapidly and easily
• Not disruptive to organization
|• Usually lowest recovery of cost|
|Source: F. Curtis Barry & Co.|