Clear It Out

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.

Multichannel strategies

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.