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Multichannel Merchandising 2.0, Continued: Clearance Strategies

There’s no question that 2007 was a challenging year for direct merchants and retailers alike. Those challenges not only extend into the New Year, but become even more difficult during the final phase of the product life cycle: markdown and liquidation of merchandise residues.

The process of post-holiday clearance selling follows a season that, for many retailers, fell well short of sales plans that were fairly conservative to begin with. Reports indicate that, factoring out spending on gasoline—which increased in price by 27% vs. LY—retail sales increased by a lackluster 2.4% during the holiday selling period, substantially less than the 4% increase forecast by industry analysts such as the National Retail Federation. Most of our clients did not have a good season, with some below both plan and last year. Said one, paraphrasing the plight that many multichannel businesses found themselves in, “Fall was soft and Holiday got worse.” Women’s Apparel, in particular, continued to trend lower, declining by 2.4% from 2006 levels. Only Electronics, paced by gadgets, video games, and a host of Apple products, continued its march higher.

Post-Christmas news stories underscore the dilemma faced by many merchants. Macy’s offered customers “After-Christmas Sale” savings of 30% on merchandise already reduced by half; on top of this, many shoppers clipped 10% savings coupons from newspapers to get deeper discounts than the company offered last year. All this adds up to a “double whammy” impact on profits; in addition to eroding margins, such clearance events end up generating little incremental revenue once all the discounts are taken.

Against this bleak backdrop, one statistic emerged that represents positive news for multichannel merchants: estimates generally pegged the increase in online sales at somewhere north of 20%. According to MasterCard SpendingPulse numbers released December 26th, the season finished with an overall year-over-year e-commerce growth rate of 22.4%, easily outperforming all other categories covered by the report. This continued momentum in the e-commerce sector could offer critical direction for multichannel merchandising strategies, particularly as a cost-effective vehicle for liquidation and clearance of residues.

Current clearance/sale promotions

Our survey of merchants across channels showed an array of promotional vehicles—some creative, but most fairly close to traditional strategies used over the last decade. For a merchant working on a 54% gross margin, keep in mind that a 10% markdown would reduce gross margin by almost 5%; for catalogers with net operating profits ranging between 4-10%, the impact of exceeding a markdown plan can be dire. Four categories emerged:

Traditional After-Christmas Sale Digest

(Example: National Wildlife Foundation, 36 pgs.). All items are clearance/sale and deeply discounted (up to 70%); often, entire categories (e.g., Greeting Cards) are shown in the catalog, which seems to be a waste of expensive space. The website mirrors the Sale Catalog during this selling period.

“Hybrid” Sale Catalogs

(Examples: Lands’ End, Eddie Bauer, LL Bean). Predominantly apparel driven, these are full size books; each offer is promoted as a “Sale Event” on the cover, but combines offerings of sale prices on seasonal categories with full pages of regular priced, higher margin basic programs. For these catalogers, their website layouts and featured items essentially mirrored the print catalog, with equal emphasis on the After-Christmas Sale and regular priced merchandise.

Pre-Christmas Sale Events

A few catalogers showed more creativity, and began their sale events roughly two weeks before Christmas, presumably a reflection of the difficult business climate. One example is Smith & Hawken, which mailed a digest-size, 36-page book to be in-home Dec.17th. 

Many companies offered “Last Minute Gifts” during the last week before Christmas with good success.

Multichannel Strategies

While the vast majority of merchants in our survey mailed out catalogs that essentially just mirrored their online stores, two displayed an effective and differentiated approach by channel to post-Christmas clearance and liquidation. Virtually all retailers used their websites to promote off-price and sale merchandise; Target and Pottery Barn did so as well, but with what appears to be some genuine strategic thinking.

• Pottery Barn mailed out a 120-page catalog immediately after Christmas; the merchandising thrust emphasized new products for Spring and bold colors, with a call-out at the bottom of the front cover announcing 14 sale pages at the end of the catalog (pages 106-119). The layout and emphasis for PB’s online store was the exact reverse: a hard-sell banner headline announcing “Winter Sale: Save up to 75% on select items.” The sale pages in the print catalog were assorted to cover all major product categories, with messages on each page directing the customer to “more great items at potterybarn.com.” This is a dramatic example of a company using channels to complement each other, rather than duplicating efforts. An expensive print catalog is being used to sell higher margin products which build the Pottery Barn brand; simultaneously, an e-mail campaign—combined with sales pages in the print catalog—drives customers to a website that liquidates clearance and seasonal merchandise.
• Target was the first to “come clean” about soft sales, with its announcement on Christmas Day that it would probably miss its December sales plan. That same day, Target launched an e-mail campaign with a one-word title, “Clearance!” which promoted the storewide clearance with savings up to 50%. However, Target’s print circulars stuck to its proven strategy of promoting key volume drivers—e.g., DVDs and Consumer Staples—highlighting key price points rather than percents off.

Components of a Liquidation Strategy

As noted earlier, a 10% markdown will result in a 5% reduction in gross margin where markups are close to keystone. In companies with large proportions of basic and fashion-basic merchandise, sales in these programs will help offset higher markdowns in fashion items. Our experience is that overall, markdowns may represent 2% to 4% of net sales, at a minimum.

The accompanying chart (Fig. 1) lists the 15 methods that companies use for in-season liquidation and clearance, with the positives and weaknesses of each. Several general “caveats” should be kept in mind when reviewing the chart:

• Planning: Clearance strategies, by their very nature, inevitably involve a greater degree of “reacting” as opposed to long-term planning. Nevertheless, it’s still critical to plan an exit strategy for all items up front, when making new product introductions. Ideally this should entail some form of vendor assistance on program items with major suppliers, as part of a seasonal business plan.
• Discipline: Markdown strategies should be approached with the same focus and intensity as a line review, particularly in planning post-holiday promotions. This approach is critical in hitting end-of-year inventory levels, as well as turnover and profitability goals.
• Benchmarks: Merchants must adhere to a “No Sacred Cows” standard in evaluating the year’s winners and losers. In maintaining a dispassionate view when discontinuing items, merchandise managers should conduct these meetings as working sessions, and participate in all decisions relating to clearance strategies.
• Timeliness: Merchandise should be liquidated as close to “in-season” as possible.
• Pricing: Always remember that pricing is a demand science—not a function of markup formulas or what you would like to recover. Generally, the saying, “your first markdown is your cheapest, make it your deepest” will prove to be the case. One important metric to consider will be sell-through percent and performance; the worst “dogs” obviously should receive the deepest price reductions.
• Media: Consider the cost of the liquidation media used. With recent increases in both the cost of mailing and the price of paper, direct merchants need to consider whether a print catalog is cost effective—or even necessary—when selling merchandise at reduced prices and margins.

In general, the choice of a clearance vehicle should correlate with the size of the product liability involved. In moving down the list of methods on our chart, it’s clear that major product residues should be promoted in larger vehicles with greater reach. As these merchandise liabilities are reduced, and sizes/SKUs become broken, smaller vehicles such as package inserts or employee sales should be utilized to flush out the final residues.

Challenges in Attaining “Best Practices”

Aside from the discomfort inherent in having to face product failures and disappointments “head-on”, there are several challenges that merchants face when trying to meet the standards we’ve outlined above for effective clearance merchandising. Chief among these would be the following:

• Lead Times: Planning a sale digest—or even sale pages and bind-ins—requires production lead times of at least three months, and often more. With consumers buying closer to need, it’s increasingly difficult to identify clearance items so far in advance, and harder yet to project their end-of-season inventory levels.
• Newness: The success of retailers such as Costco—and its “treasure hunt” approach to frequent product rotation—emphasizes the importance of offering consumers new product on a regular basis. With the duration of most holiday catalogs often exceeding four months (September-December) for many direct merchants, their customers are often hungry for new product introductions by the time December 26th arrives. The mailing of a Sale Digest, while helping to achieve the clearance of residues, leaves the promotional calendar stale, and risks tarnishing the cataloger’s brand.
• Profit Constraints: As we stated earlier, clearance pricing should be its own science; demand-based, and aimed at hitting the price that will motivate your customers to buy, ultimately liquidating a product’s residues. However, in a difficult retail year, when many merchants have missed sales and margin plans, the “vicious circle” effect often prevents them from taking the aggressive markdowns necessary to sell merchandise. In these cases, a meager price reduction will only reduce your stock by the amount of the markdown—and your DC will be left housing substantial stock residues.

Taken together, all of these challenges show the competitive disadvantages of using print media when executing clearance merchandising strategies. Traditional sale digests are expensive—costly to produce and extremely costly to mail. With marketing expenses for many catalogers averaging 30% of net sales or more, these clearance items will negatively impact profits once all expenses of the mailer are allocated. And in a worst case scenario, the products in a sale catalog may have unexpectedly sold out by the in-home date of the catalog, leading to disgruntled customers, wasted marketing expense, and foregone revenue.

The Way Forward in the Age of Multichannel

In previous articles (“Merchandising 2.0: E-commerce isn't the only facet of multichannel marketing to advance,” October 2007)we have described ways in which cross-channel merchandising strategies are evolving as the growth in e-commerce continues to accelerate. The merchant’s channels need to offer its customers a consistent shopping experience; however, “integrated” channels do not necessarily have to be identical. Increasingly, successful multichannel merchants utilize channels to complement each other, in a variety of strategies and approaches.

Liquidation and clearance strategies offer just such an opportunity. In an example we cited earlier, Pottery Barn mailed its print catalog on December 28th, containing 90% new product and 10% clearance. On the website, the emphasis is reversed, as the home page announces a Winter Sale, with up to 75% savings. This cross-channel strategy offers several advantages:

• Clearance merchandising is largely about reacting, versus the long-term planning associated with new item development and product launches. Online merchandising, by its very “real time” nature, is more conducive to the process and constraints imposed when selecting, pricing, and promoting clearance items.
• Once an item is marked down, the primary promotional component becomes price. While other product features—fabric, exclusivity, etc.—remain important and deserves emphasis, sales of such items will be driven by either a key price point and/or percent savings. Given the need to “tell a story” and romance full price merchandise (unique features, functions, etc.), expensive print catalog space should be used to drive these high-margin categories, as opposed to off-price, lower margin goods.
• We suggested above that ideally, there should be a correlation between large product liabilities and the reach of the vehicle selected to liquidate them. The plus-20% growth experienced by the online sector this past holiday season confirms that the retailer’s online store is no longer a “step-child” but a thriving channel of distribution—one whose sales exceed a 50% share of volume for many direct merchants.

We would add for emphasis that this view is of a cross-channel merchandising strategy where channels complement, rather than supplant each other. At key “transition points” of the retail year, aggressive clearance strategies need to be pursued simultaneously with new, regular price introductions. Utilizing alternate channels to achieve these objectives offers the direct merchant a coherent means of making such transitions effectively and more profitably than in the past.

Finally, merchants need to avoid the risk of any one channel being used exclusively to execute a specific strategy on an ongoing basis. While customers expect to see website promotions during December and January, the online store and e-mail promotions should never turn into a “bargain basement”; conversely, the print catalog will benefit from having sale pages which function as a “hook,” enticing the customer to view regular price offerings as well.

In entering this new realm of multichannel merchandising, channels will not compete for sales, but create synergies where varying strategies—both clearance and regular price—can be executed successfully.

Curt Barry is president of F. Curtis Barry & Company, a multichannel operations and fulfillment consulting firm with expertise in multichannel systems, warehouse, call center, inventory, and benchmarking. Learn more online at http://www.fcbco.com.

Strategy	Positives	Negatives
Internet/Web Includes eBay, e-mail, Amazon Among highest use	Immediate, flexible Low cost Highly effective Not staff intensive Internet as % of total net sales averages 50% of direct sales in many companies with catalog or Internet.	Customers may wait for items to go on sale; may create sale buyers rather than full price customers Need to capture email address to do email marketing Still remains minority of direct shoppers in some companies (e.g. older customers) Failure of match back to identify which promotion customer responding to.
Relist/Repeat	High response and cost recovery if item was a winner	Repeating losing item is seldom productive Space better used for new item
Return to Vendor	Good way to recover cost if re-orderable product.	Not fully utilized by catalogers May pay restocking fee Pay freight back Must negotiate up front Not exclusives or imports
Clearance Catalog	High response and cost recovery Opportunity to buy inventory to increase response and margins on winning items	Too expensive for small quantities of product; or broken, colors/size assortment. Competes with regular catalogs Requires planning and creative efforts
Bind-in clearance inserts	Good response and cost recovery Easy to adjust circulation to inventory quantity	Competes with full-price items Can cheapen image for some catalogers
Package Inserts	Sent in outgoing packages Easy to adjust circulation of small inventory quantities Low cost – easy to produce Coop programs with other mailers are a revenue sources	Rate of clearance tied to number of outgoing packages
Sale pages Among highest use	High response and cost recovery	Cannot adjust circulation to inventory quantity. Uses regular selling space Competes with full-price items May cause image problems
Outlet Stores Among highest use	Good way to move damaged and defective goods. Need X stores for Y million $ in net sales. Can open selective dates or days	Difficult for many catalogers to manage and merchandise properly High fixed expense. Can create nexus problems
Telephone specials	Quick response to overstocks	Difficult to train CSRs and set up and maintain effective system prompts Can hurt catalog’s image Can be offering item off price when customer paid full price
Telephone specials (cross-sells)	Some companies can add 3% to 5% to average order. Degree of success is product-related and CSR training. Some companies use affinity selling programs	Difficult to train CSRs and set up and maintain effective prompts
Warehouse sales	Move large quantities of units. Good way to move damaged and defective goods	Can be very disruptive to normal operations Staffing, parking, POS, crowd control logistics
Sales for Employees Only	Major employee benefit Can be constant method in use	Cost recovery is low May not move large quantities of overstock Remainders may not be first quality
Roving tent sales	Move high number of units Good way to move damaged and defective goods	High expense. Staffing, parking, POS, crowd control logistics
Charitable donations	Generally last resort, but has some tax advantages Some donate all damaged and defective goods	Low cost recovery
Jobbers (The Undertaker)	Move large quantities of goods rapidly and easily Not disruptive to organization	Usually lowest recovery of cost

 

Curt Barry is president of F. Curtis Barry & Company, a multichannel operations and fulfillment consulting firm for catalog, e-commerce, and retail businesses. We offer clients expertise in business process and order management systems, inventory management systems, warehouse management systems; warehousing and distribution; contact center services; inventory management and forecasting solutions; and strategic, financial, and operational planning for all business channels.

He can be reached at 1897 Billingsgate Circle, Suite 102, Richmond, VA 23238, phone: 804-740-8743; email: cbarry@fcbco.com; website: http://www.fcbco.com.