Last week in the first part of this article, we looked at the parlous state of apparel retailing in Australia and the fact that the difficulties started to emerge as far back as the 1980’s, when retailers switched their source of supply from local manufacturers to imports. Clearly this was an essential thing to do, but the side-effect has been lower retail prices and hence no real growth in the market.
In a static market, the only thing that has kept retailers afloat is population growth and higher margins. However, while higher first margins have saved the day, there is another sting in the tail.
Higher first margins give the retailer more latitude to markdown and promote to drive the business. Over the last 20 years or so, first margins have probably improved in the range of 10-15 per cent and this has “bought” approximately 30-45 per cent more markdowns to give the retailer the same achieved gross profit.
As the cost of markdowns is now so much lower, the market has shifted from one where markdown used to be managed as a scarce resource in the company, to one where it is managed much more loosely.
The market has become much more reactive and the way markdowns are taken is less in response to internal stock issues and more in response to what competitors are doing. We’ve all sat around meetings and heard the chorus “Company XXX has gone 40 per cent off” or “It’s a sea of red out there”. Yes, companies are taking the product related markdowns, but now they are throwing even more at short-term sales problem and turn on “Take a further 50 per cent” at the drop of a hat. But hey, with higher margins we can afford that, right? No wrong!
The sting in the tail is not just with the higher markdowns, we need to peel away one more layer of the onion to expose the real problem. The fundamental question is; what is all that promotional activity doing to your customers’ behaviour and perhaps more importantly to your brand?
Firstly, the customers are now so conditioned to high markdowns, they behave just like Skinner’s rats in his famous animal behaviour experiments in the 1930’s. His rats learnt to push the correct lever to receive a food reward. Today our customers simply sit tight until we pull the markdown lever and they get the reward!
Maybe the retailers are the rats and the customers have conditioned us!
The second problem relates to brand damage. Brands have many facets, some are fun, some are quirky, some serious, some prestigious but at the end of the day all must earn the TRUST of their customers. Perhaps one of the quickest and most effective ways to erode that trust is with high markdowns.
The management of markdown needs a broader and more holistic view as it goes way beyond the short-term sales problem in a particular week. Ultimately the brand is at risk.
Graham Lack has over 35 years retail experience in senior management roles at Luxottica and Suzanne Grae, in retail operations, finance, IT, marketing, merchandise planning and logistics. Contact him via graham.lack@