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Marking it down

A method to controlling markdowns

There is an exercise that occurs several times a year in many garden centers across the country. This event is called a clearance sale. As an example, we went through the exercise of buying merchandise that we expected our customers would purchase during the spring season. When spring is over, we look about the store and see just how many of those customers that we were expecting, did actually come into the shop and purchase the items we hoped they would buy.

Perhaps we thought we would sell a dozen of a ceramic planter that is adorned with painted spring bouquets. Unfortunately, only seven customers were thinking the same way and purchased the planter. Now we are left with five of this planter that we can either store away for next spring or we can mark down in an effort to get them out of the building and get the cost of the planters back into the checking account so we can purchase something new.

This exercise will be repeated in the fall as we will want to clear out unsold summer merchandise. Ideally, we would prefer to never have to experience this exercise. We would like to think that as a buyer we made the correct estimate of sales each year. Realistically, this is not going to happen.

On a positive note, there is nothing wrong with our having these clearance sales several times a year. Customers have come to expect them, and properly used, they can be a way to invite the public to shop in your store as well as being a way to reward your existing customers with some off-price offerings.

If these events are uncontrolled, and result in massive markdowns of your leftover merchandise they can seriously erode the maintained gross margin in your store. And with rising payroll and other operating expenses, this decrease in margin can spell disaster.

So, what can we do to not only control this situation, but utilize these events to actually grow our business? The answer starts with our developing a written plan of how much inventory we are going to purchase in each of the product categories during each of the seasons.

Whether we are anticipating a great or modest sales increase, stagnant sales, or even a sales decrease, we must start the process with a plan of how much inventory it is going to take to create the amount of sales we are expecting to have.

Secondly, every store needs to add new products to the selection each year. This is one of the key ways we persuade customers to come back time and again. We should set aside from our overall inventory budget, a percentage of those dollars for purchasing these new products. Even when we go to the IGC show and see 100 new items that we think will sell, only if we have enough dollars in this “new product” budget can we afford to purchase all of them.

For both the basic and new product categories, we need to establish a monthly budget for purchasing. The mathematics of this exercise is quite simple. Let’s consider planters as a category. For the month we are anticipating $1,200 in sales. This category has a gross margin of 35%. Multiply the sales by the reverse of the gross margin. The answer would be $1200 multiplied by .65 giving us an answer of $780. For this month, we need to purchase $780 in inventory to support the $1200 in sales.

Utilizing this formula, we can do several things so that the clearance sales we have will have the amount of inventory we want to have for clearance as well as a margin that is better than what we have been experiencing. Here is what we can do.

With any category of products as an example, let’s realistically anticipate that the merchandise we purchase will have a sell through rate of 85%. This means that we expect we will sell 85% of the merchandise at full price. The other 15% is going to be the merchandise that is left over at the end of the season. If we think this is too much “left over” inventory, then we need to reduce the amount of inventory we are initially purchasing.

If we decide we are OK with this situation, we then need to look at the clearance sale plan. We know that we are going to have 15% of the seasonal merchandise to start with. We could speak to our vendors to ask for their close out merchandise that we could purchase for the specific purpose of including it in our “after season” sale.

Using this scenario we know before the season begins, a good idea of how much inventory we will have in the clearance sale. If this amount appears to be too much, then we consider reducing the amount of regular merchandise or special buy merchandise that we purchase.

What if we have a much larger sell through, and find ourselves with nothing left for the clearance sale? Then we will smile and enjoy the extra sales and profit. This represents a very different thought process for having a clearance sale. And if you are tiring of seeing your seasonal profits sit on the clearance table, you will do yourself a favor by trying this “planned” clearance sale for the coming season.

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This article is copyrighted by Tom Shay and Profits Plus Solutions, who can be reached at: PO Box 1577, St. Petersburg, Fl. 33731. Phone 727-464-2182. It may be printed for an individual to read, but not duplicated or distributed without expressed written consent of the copyright owner.

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Profits Plus Solutions, Inc.
PO Box 1577
St. Petersburg, Fl 33731
(727) 464-2182
Fax: (727) 898-3179