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The Traditional Markdown Cadence is Over and the New Model is Anything but Simple

During the pre-holiday week of Nov. 9, upscale department stores like Saks and Neiman Marcus shaved an average of 14 percent off the original full price of a clothing item, a slightly steeper discount than the 12 percent markdown during the same period last year, according to StyleSage.

Apparel sales at the sector’s mid-tier brethren like Macy’s and Kohl’s also offered better bargains for consumers this month: 30 percent this year versus 27 percent in 2017.

A cursory look at the figures might suggest retailers are still hitting the markdown panic button, despite efforts to reign in undisciplined sales activity that inures shoppers from buying for reasons other than price, and hurts profit margins.

But the answer is more complicated.

Retailers like Macy’s and J.C. Penney are jockeying to better sync promotions to sales trends and consumer demand by boosting supply chain efficiencies and mining data analytics to markdown merchandise more accurately, according to recent earnings calls with retail executives and interviews with industry analysts.

So rather than “taking a blunt hammer and discounting everything,” they’re being surgical about it, Coye Nokes, a partner with OC&C Strategy Consultants, who leads consumer and retail for the consulting firm, told Sourcing Journal. The idea is to yield a more profitable promotional model.

Meanwhile, brands like Coach and Ralph Lauren are driving more full-price sales via direct-to-consumer channels where they can control pricing and protect their brand equity. That marks a course correction after markdown mania took a toll on profits. In recent years, brands like these exited hundreds of highly promotional department store doors.

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Brands shrinking their business at sales-happy Macy’s, for example, included LeSportsac, which pulled out of the chain entirely last year.

The retailer now describes a somewhat changed picture.

Tapping inventory-management “discipline” and data analytics to “inform our various inventory decisions has been helping us to do more full-priced selling, and sell more merchandise,” said Paula Price, chief financial officer, during the retailer’s third quarter earnings call this month.

Indeed, “Macy’s is still promoting, but they are becoming increasingly sophisticated at managing their promotions and overall margins,” Nokes said.

Macy’s more moderately positioned rival J.C. Penney has been holding fire sales on slow-moving traditional women’s apparel to make way for more casual and contemporary styles. But don’t let those liquidation sales fool you: They actually mask progress that’s poised to fatten Penney’s bottom line, executives said.

Yes, the retailer is liquidating goods, which is hurting margins. But the margins on non-clearance goods are actually improving, Trent Kruse, senior vice president of finance, said during Penney’s third quarter earnings call this month.

“Non-clearance selling margins both in-store and online were up versus last year. This speaks to the progress we are making in our assortments and provide evidence that as we continue to get our inventory better aligned with our customers’ wants and expectations, we will deliver improved profitability,” Kruse said.

The direct-to-consumer path to full-priced sales

Brands’ bold moves to protect profitability by kissing much of their department store business goodbye have begun paying off for some.

Item-level discounting at both Coach and Ralph Lauren, which exited 25 percent of its department store distribution in fiscal 2018 while closing many of its own freestanding stores, is practically nil, said Elizabeth Shobert director of marketing and digital strategy at StyleSage.

In fact, since June, “we’ve seen a significant decline in the number of products being discounted in apparel, accessories shoes and bags at both Ralph Lauren and Coach’s DTC channels,” Shobert said.

At Coach, the change marks the imprint of Tapestry CEO Victor Luis. Since joining the company in 2014 to restore the brand’s upscale luster, Luis has reversed its flailing performance, which was heavily tarnished by massive discounting and overexpansion of its namesake stores, including its Coach outlets.

The brand dramatically reduced its department store presence, shuttered hundreds of its own stores, and nixed most of its online flash sales while nurturing the high-end of its business.

And although the promotional retail environment for handbags is still, well, promotional, “we were able in that environment to deliver significant expansion in our gross margin,” said Luis, during Tapestry’s November earnings quarter earnings call.

“Tapestry is a great example how a company is using product and merchandising innovation to get themselves out of the death spiral of promotions and markdowns,” said Susan Lee a partner with retail consultancy Simon-Kucher.

It’s an outgrowth of Luis’ vision to build the multi-brand modern luxury fashion conglomerate.

“Promotions are down in part because of a renewed focus on designing product that sells at full price,” Shobert said. “For example, they’ve had a strong partnership with [actress] Selena Gomez, which gets them in front of a younger customer. And Tapestry’s acquisition of Kate Spade last year was designed to grab data on coveted Millennials, and leverage that across the organization.”

Tapestry CFO Schulman credited its data team’s innovative use of advanced analytics, like leveraging machine learning for product allocation, pricing and promotion planning, “with optimizing processes.”

That’s also clearly helped tame the sales beast. Coach’s promotional calendar days have declined sharply from last year, just as the sale of full-priced handbags and accessories from Kate Spade have been “standouts, driving year-over-year increases,” Schulman said.

But while brands are clearly doubling down on reducing promotions overall, they’re not necessarily promoting less frequently, Lee said. Instead, there are fewer deep discounts and markdowns, “and they’re taking more products out of store-wide promotions—which is still why you see promotions all the time.”

And sales are here to stay. “Brands cannot afford to reduce frequency because consumers have been trained to look for deals. “Without promotions, traffic would absolutely drop,” Lee said. “They’re just being smarter about them.”