One Banana, Two Banana
The Lifecycle of Merchandise
by: Ritchie Sayner
A case could be made that the lifecycle of merchandise could be looked at in much the same way as visiting relatives; excitement for arrival, and shortly thereafter anticipation for departure. Merchants are excited to receive the next season’s fresh new inventory, yet once it lands they try to figure out how fast it can sell to begin the process all over again.
Each style, size and color has its own life expectation. This cycle of life begins when merchandise is received and is complete when the goods have left the store. Several factors help determine a products lifecycle. Gender, product classification, selling season, whether the item is a fashion or basic, all affect the length of time an item remains in the store. Circumstances that play havoc with lifecycle most certainly include weather (a warm fall can delay the start of boot selling, but at the same time extend the life of sandals, for example).
To best understand the concept of product lifecycle (and in particular, the exit strategy of same), a merchant need look no further than the local grocer. Bananas illustrate the point beautifully. Most grocery shoppers buy bananas with a hint of green (preseason delivery) knowing that they will ripen quickly on the home counter within a day or two and be perfect to eat (in season). If, however, you have purchased more bananas that you can eat in a given time period (overbuying), the fruit will soon become overripe (out of season), be covered in little brown spots and be suitable only for making banana bread (markdowns). (Pardon the digression, but my banana nut bread recipe is pretty darn good, if I say so myself – see insert below). This timeframe represents post-peak season and is where clearance activity occurs.
Retailers should have a well-defined exit strategy for all merchandise. As in the banana example, each item has a shelf life, if you will. The exit strategy is a function of the store’s sell-through and GMROI goals. The execution of the exit strategy process is subject to a category-specific markdown cadence.
RELATED: Floor Space: An Upside to Markdowns
A cadence is a natural rhythm or flow of something. A markdown cadence ensures that all remaining inventory is sold through as profitably as possible while making room for the arrival of new merchandise. Many stores are helter-skelter on this concept and as such end up taking too many markdowns and usually the timing is wrong. As a result of no predetermined markdown schedule, retailers often end up waiting until too late in the season to take clearance markdowns and never maximize the true margin potential of the classification. Another symptom of a lack of markdown planning is the “panic” markdown. This type of markdown generally occurs when a retailer becomes worried about a lack of traffic or needs cash and typically overreacts by temporarily marking down the entire store, line or category. No real thought is given to margin outcome or resulting inventory balance. This is truly an example of a ready, fire, aim approach to markdowns.
Even worse than having no markdown strategy is the store that waits until the season is over on seasonal merchandise and simply decides it would be more cost effective to “carryover” the inventory in lieu of marking the merchandise down and moving it out. Although there are examples where this strategy may be acceptable, it is far from an ideal situation on a consistent basis, as it reduces turnover and ties up cash. There are too many variables to be overly specific, so I will only share one general cadence for purposes of example only.
• In-season markdowns. Taken after merchandise has been offered for sale for a predetermined time with limited activity. 20% off in-season might be sufficient to accelerate sales and prevent greater markdowns if not acted upon until late in the season.
• First clearance reduction might be one third off. Sales will spike after the markdown is first taken and then plateau or fall off until further reductions are made.
• The next markdown in the sequence might be 40 percent or 50 percent off depending on the merchandise and how aggressive the merchant is. The time to take this reduction is maybe 10 days to two weeks after the initial clearance markdown is taken. Sales will again spike and then level off signally the time for round three, the final clearance.
• The final clearance can be easily identified when you see ads that say 75% off or “take 20% off the previous markdown” or “values to $150, now $49.90 saving up to $100” or BOGO (buy one, get one). In some cases, the final markdowns are now transferred to a markdown room or area within the store where even greater reductions will be taken until all the items are sold (red dot, blue dot, green dot, etc). Stores that manage this sequence effectively will actually buy off-price specifically for this area as they may have customers that frequent the sale area.
The example above is generic and will vary from retailer to retailer and by type of merchandise. All retailers should develop a thorough understanding of the lifecycle of merchandise and consistently practice active markdown management. Those that choose not to may end up with … banana bread.
Ritchie Sayner is vice president of business development RMSA Retail Solutions, www.rmsa.com. To follow him on Facebook, go to www.facebook.com/RitchieSayner.
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