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How to Best Reduce Markdowns and Maintain Margins

Browse through any online store or shopping mall and you’ll see it everywhere: Massive savings! Reduced to clear! Priced to go! While these signs may be good news for consumers looking to score a bargain, the cost of unplanned markdowns is the single most significant dilution to profitability in retail fashion.

In looking at ways to address this ubiquitous trend, it’s important to acknowledge that planned markdowns have been part of the retail landscape for years; with annual or seasonal sales being infrequent and highly anticipated events. With the growth of low cost manufacturing many retailers have increasingly focused on price as an ongoing strategic point of difference, relying on lower costs, allowing margins to remain acceptable and to help drive greater volumes.

In this “pile it high and sell it cheap” environment, aligning supply with shifting demand becomes almost impossible. With excess stock taking up valuable space and tying up precious capital, frequent permanent markdowns become the option of last resort; slashing prices and eroding profits just to rescue any percentage of cost.

There are a handful of ways to step off the high-volume, low-price treadmill and reduce the need for costly markdowns. By delivering the right products to the right people at the right time and in the right quantity, successful fashion companies can effectively reduce waste, maintain margins and increase profits. Planned markdowns continue to work – and unplanned markdowns continue to grow – and consumers continue to wait – knowing that time is their friend and the retailer’s enemy. Meanwhile net/net margins continue to erode and brand loyalty is replaced with sale price infidelity.

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Make sure you understand the market

The importance of consumer insights is a no brainer, but in today’s fashion environment where loyalty is fickle and choice is abundant, understanding your market is crucial for aligning supply and demand. The good news for modern retailers is that technology can help you plan with greater accuracy. Big Data analysis of buying patterns, merchandising strategies, sales results and constant consumer analytics can all be used to enhance your forecasting ability. Even more valuable are online tools that allow you to engage directly with your existing customers and gain their opinions through open dialogue. Combining this focus with a comprehensive CRM strategy creates a whole range of ways to gain competitive advantage by fostering a deeper understanding of consumer desires. Predictive analytics is all about making better guesses. Prescriptive analytics is all about asking your demand base for their opinion on your guess work.

Be open to the consumers’ opinions

Changes in the relationship between companies and consumers are transforming product innovation.

In developing ranges that cater to demand, your customers can be a massive untapped pool of knowledge. By embracing consumer opinions and suggestions, not only can you gain enormous insight and develop more appealing collections, you can also enjoy stronger, more lasting relationships. Be prepared to respond immediately to consumer reactions: test; replenish; remove; and move on.

Align the supply chain with demand

Being able to accurately align supply with shifting demand is largely dependent on your relationship with your suppliers. It’s important to view these partners as part of your business by integrating your supply chain data with their operations for end-to-end visibility.

Stay nimble and respond at a moment’s notice

Limit your losses and fuel your gains. In the business of speed to consumer, where today’s success can be tomorrow’s failure, planning too far ahead can spell disaster for profit margins. Most collections have a very short lifespan, with the price of garments usually starting to reduce the minute the season begins. And the longer those garments sit on shelves or in a warehouse, the less likely they are to sell at full price, or at any price. To maintain margins and reduce your need for markdowns, the most important asset you can have is the ability to control supply at a moment’s notice and quickly ramp up stock to meet increasing demand, and scale down production as soon as demand tapers off. Take a page from the book of any sports legend: “go out on top.” That’s to say it’s OK to sell out; you don’t have to keep buying until the markdowns erode the previous profits.

Collaborate internally for greater efficiency

To deliver innovative products to your customers with speed and flexibility, you need to create visibility across your entire organization. This means that collaboration across teams is paramount and organizations should unify the efforts of creative, technical and commercial teams using social collaboration to streamline the design, development and sourcing process.

‘Lean’ on your network

Connect your business to expert skills whenever you need them and when you focus on delivering the right products at the right time, you need to be able to manufacture with accuracy, certainty and efficiency. By having a deep knowledge of supplier capabilities and specialist skills, you can assign the right job to the right supplier according to its respective strengths and location. Keeping partners engaged is important for building a reliable network; your relationships should be based on mutual interest. The key here is to be important enough to your partners to have influence, without locking yourself into exclusivity arrangements. Use your supply chain as if you owned it: don’t abuse it, nurture its profitability, share the risks and share the rewards. Carry lean inventories throughout the supply chain and extend that lean inventory philosophy through the entire value chain.



Bob McKee has more than 40 years of experience working in and with apparel, footwear, home textiles and fashion accessories companies. He has hands-on experience sourcing apparel products around the globe and was one of the first US apparel executives to start sourcing in China in the early 80s. His knowledge and skills span retail, sourcing, manufacturing, and product development within the fashion industry.