Clear It Out

	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.

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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.

A look at liquidation strategies

Strategy	Positives	Negatives
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.