Managing Markdowns

Museum Store Magazine, Museum Store Association

By Joan Doyle
doyle + associates
January, 2009

Sale is a four letter word to the independent retailer. Markdowns mean less profit margin and lower profits is never healthy for any business. So how does a retailer manage markdowns without jeopardizing overall profitability? First you need to understand the types of markdowns and their respective role in a retail operation.

There are two types of markdowns, planned markdowns and permanent markdowns.

A planned markdown is a promotional or sales tool usually with limited sales periods to entice customers into the store with the lure of a special bargain (i.e. 20% off during anniversary week). The negative effects of this type of markdown on overall profitability are limited and it is used to jump start activity-not clean out slow moving inventory.
With large retail chains it is customary for vendors to compensate retailers for price cuts needed to sell their goods with so-called “mark-down dollars”. The vendor helps offset the loss needed to generate customer purchasing. This is not typically the case for small independent retailers or museum stores because they lack negotiating purchasing power. What they buy from a vendor they have to sell and as close to full margin as possible.

A permanent markdown is a devaluation of a product. It is an attempt to sell it at a lower price than originally planned because of over purchasing or lack of customer response.

Every retail business should budget some dollars towards markdowns. There is no one formula to reference because the nature of the product determines the degree and frequency of markdowns. The more time or season sensitive the merchandise the faster and more frequent the markdowns. For example, clothing is a fashion and season sensitive product and typically has a four to six week full margin selling period. After that the markdowns start because the retailer has to move it out to make room for the next season’s merchandise.

Museum stores carry a variety of merchandise categories including books, textiles, jewelry, toys, etc., and most of this merchandise is not time or season sensitive. So with the exception of seasonal products (i.e. Holiday) merchandise has a longer shelf life. However longer shelf life should not be interpreted as unlimited shelf life. If after six months a product has failed to sell though 75% of the original opening inventory purchase, then it’s time to consider removing it from your inventory with a permanent markdown. Slow selling merchandise ties up purchasing dollars for newer fresher merchandise that could sell at full margin. The faster the markdown merchandise sells the quicker you can replace it with full margin merchandise which reduces the impact of the markdown on your profit margin. In the current retail environment 20% off means nothing. I suggest that permanent markdowns start at no less 30% off to move the merchandise quickly, and 40% and 50% off is even better. When customers see a sequential pattern of markdowns, i.e. 20% off to 30% off to 50% off, it has an adverse effect on sales. Rather than seeing a terrific bargain that some else has overlooked, they see a loser that no one else wanted. It destroys the merchandise integrity and reduces the ability to sell the merchandise at any price.

We have just experienced the worst retail holiday season in four decades. When the dust finally settles many established retailers, both large and small, will be forced to close their doors forever because they didn’t foresee the looming economic crisis. Few did. Even the so called experts failed to realize the full impact that the mortgage and credit crisis would have on the economy and it took eleven months before the Fed’s acknowledged what small business owners already knew-we were in a recession, the longest on record since the Depression.

So what does this mean and how will it impact sales in museum stores? First of all, don’t believe that museum retailing is exempt from feeling the effects of the overall dower retail climate. For the most part museum stores are dependent on museum visitation for a customer base, and with few exceptions museum retail is the result of impulse purchasing and not destination shopping or necessity purchasing. In tight economic times impulse purchases decline at a higher rate than necessity purchasing (i.e. food, prescriptions, etc). As a rule museum store customers are not motivated by price but the markdown mania of the recent holiday season and that of the overall retail market place will influence your customer too. Moving forward they will seek out fare and value priced merchandise over luxury products.

As the saying goes the best defense is a good offense. By managing inventory levels well you will reduce the need for markdowns and the risk of lowered profitability. Here are some tips on how to do that:

• Plan your sales conservatively; unless you have a major exhibition planned which will draw huge visitation, it is unlikely that 2009 will be a banner retail year.

• Adjust markup so that lower priced products get a higher margin and higher priced products a lower margin.

• Focus on value priced merchandise over luxury merchandise.

• Don’t stop purchasing-new inventory is critical for continued stability especially for stores that depend on repeat business (i.e. museum members) as their customer base.

• Maintain purchasing liquidly, don’t commit up front to your sales purchasing plan. The economic environment is in flux and there is no way to know with any certainty how close your sales are going to meet your projections or what merchandise is going to drive sales. Keep a portion of your purchasing dollars in reserve as long as you can so you buy right.

Joan Doyle, the principal and owner of doyle + associates, has over twenty years of diversified retail planning and management experience with emphasis on retail specialty store operations, strategic planning, profitability improvements, retail store design and new store openings. Email Joan at [email protected].

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