By Grant Wright
Global Managing Director
Merchandising
The Complete Retail Markdown Planning Guide: 8 Ways to Boost Performance
As Winston Churchill famously said, “Those that fail to learn from history are doomed to repeat it.”
While no two historical events are exactly the same, we do know that the retail industry always has been—and will continue to be—full of disruption. But, those that use these learnings as an opportunity will continue to succeed in the face of adversity.
That being said, it’s important to take this opportunity to look back into 2022 and the valuable lessons we learned especially during the holiday season. What was the talk of the town in 2022? Consider this short list of factors listed by McKinsey:
- Prices are up, spending is down: 30% of consumers in July 2022—compared with only 15% in March 2020—said they were pessimistic about US economic conditions.
- External forces converging: Ongoing supply chain disruptions, persistent labor shortages, rising fuel costs, geopolitical issues related to Russia’s invasion of Ukraine, and renewed COVID-19 lockdowns in China have spilled into the new year.
- Mounting inventory: Many retailers are anticipating aggressive markdowns to address these inventory pileups, and have been forced to update earnings statements, causing stock prices to take a hit.
While this is just a snapshot of the buzz surrounding the retail industry last year, the common denominator stems from this unprecedented and historic inventory glut.
That’s why at Logic, we took this top-of-mind topic and turned it into the research focus of our “Complete Retail Markdown Planning Guide: 8 Ways to Boost Performance.”
History Repeating
The reality is that markdowns are a fact of life in this industry and like so many things pandemic-related, the subsequent whiplash highlighted the long-standing challenges with retailers and markdowns.
As a result, retailers end up leaving margins on the table because, for many, these markdowns are still a blunt-force instrument—meaning they are implemented across entire categories and swaths of locations all at once resulting in markdowns that can be:
- Too steep / too shallow
- Too soon / too late
- Too broadly implemented / not required
So what does this mean for retailers? Just a few short years ago in 2018—pre-global pandemic—markdowns were costing US retailers $300 billion in lost potential revenues. Before the pandemic (under normal circumstances) that potential revenue loss is a big financial hit, so imagine the implications of those losses on the heels of this ‘sonic boom of inventory’ today.
While markdowns can be a costly expense if not done right, they also can be an area of opportunity for retailers.
Big Gains Within Reach
Markdown planning technology of the past was limited, leaving merchandisers stuck with manual spreadsheets that couldn’t scale. Today’s technology is different and there are big gains within reach from improved markdown planning.
What’s more, markdown optimization is also an opportunity for every retailer, regardless of their size or stature. Retailers that seek to mitigate the impact of excessive inventories are increasingly making investments in their markdown planning capabilities to achieve:
- 10%+ improvements in gross margin dollars
- 10%+ improvements in sell-through
- 5% increase in revenue
- Reduced inventory carrying costs
- Increased cash flow and working capital
In fact, Macy’s CFO Adrian Mitchell recently pointed to investments in data science and inventory management that “allow us to maintain healthy margins and strong cash flows over time.”
Don’t Get Stuck, Just Get Started
The path to improvement can seem overwhelming, and many times, it’s tough to determine where to start. That’s why, in our research, “The Complete Retail Markdown Planning Guide,” we include 8 best practices for guiding your journey.
Here, I’d like to preview the first four best practices you’ll need to boost your performance:
- BE RELENTLESS: Build and leverage insights at each stage of the markdown planning process. Analyze historical data to understand product performance, uplifts, tactics, etc., and use this to drive future effectiveness and buys.
- GO GRANULAR: Recommendations and forecasts must be made at the lowest levels of the store, and product hierarchies, and should take into consideration various factors such as margin, stock, elasticities, customer behaviors, zoning, and channel.
- FORECAST AND RE-FORECAST: Model various scenarios including ‘what-ifs’ to realize the best outcomes based on the strategic goals. But, once is not enough. Flexible, adaptable forecasting engines that harness near real-time data are critical.
- MAKE INTEGRATED DECISIONS: Markdown systems that integrate price, promotions, and markdowns ensure more accurate stock forecasting and help drive stronger decisions.
- DOWNLOAD OUR GUIDE for the rest of the best practices and more insights.
From Learnings to Action
Turning markdown planning best practices into reality requires improvements and changes in the way you approach people, processes, and technology within your organization. That’s why, in our complete guide, we also include actionable steps for success including:
- Understanding where you stand today with the help of our markdown planning maturity model.
- Defining the ideal markdown planning systems architecture and identifying gaps with our intelligent markdown architecture diagram.
- Building requirements for your next-gen solution, with our starter requirements checklist.
After you’ve downloaded the guide, feel free to explore the merchandising practice I head, as well as Logic’s additional practices in data, stores, digital, and cloud. We are here to help bring it all together.
Cheers to a successful 2023!
Grant Wright is the Global Managing Director of Logic’s Merchandising practice. He is a strategist and change agent who defines and executes large-scale, complex implementations that transform client organizations and build value. Grant’s experience as a retailer includes serving as a VP of market insight and strategy, as the VP of merchandise planning for Harvey Nichols and Bloomingdales, and as the enterprise architect on large, complex programs.