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Mark it down, move it out!

A strategy for getting rid of merchandise

There is an exercise that occurs at least three times a year in businesses across the country. Monst frequently it first happens in the month of January, a second time when spring arrives, and a third time when fall arrives. For some businesses it seems to be an ongoing event. 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 holiday season. When Christmas was over, we looked about the store and saw just how many customers actually came into the shop and purchased the items we hoped they would buy.

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

This exercise will be repeated in the spring, as we will want to clear out the unsold winter merchandise, and again in the fall when we want to clear out the leftover 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 three 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 multiple-times-a-year events are uncontrolled and result in massive markdowns of your leftover merchandise, they can seriously erode the maintained gross margin in your store. 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 also to utilize these events to actually grow our businesses? 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.

Second, 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 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 dog food 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 $1,200 multiplied by .65, giving us an answer of $780. For this month, we need to purchase $780 in inventory to support the $1,200 in sales.

Utilizing this formula, we can do several things so our clearance sales will have the amount of inventory we want to have for clearance as well as a margin 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, we need to reduce the amount of inventory we are initially purchasing.

If we decide we are okay 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 ask our vendors for their close-out merchandise that we could purchase for the specific purpose of including it in our "after-Christmas" sale.

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

What if we have a much larger sell through and find ourselves with nothing left for the "after-Christmas" sale? 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.


Tom Shay is a fourth generation small business owner providing proven management and business building ideas through his Profits Plus Seminars, Profits Plus Solutions coaching, books authored, and articles written. Tom can be reached at 727-464-2182 or through his web site: www.profitsplus.org


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