Retailers are now getting ready for the transition to spring and the clearance racks are full of last season’s goods. A surfeit of goods marked for clearance even after repeated price reductions during the season is a sign of mismatch between supply and consumer want. In the apparel industry, one of the reasons for this misallocation can be traced to the buyer and the prevalence of markdown dollars.
The buyer is responsible for determining the merchandising assortment that is on display in any given category in the store. He is the main connection between vendors and consumers, exercising tasteful discretion and an understanding of the retailer’s bottom line. This means that the buyer is often charged with maintaining profit margins and customer’s expectation that the store can be relied upon for a wide range of desirable merchandise. These objectives are not always compatible and can represent conflicting responsibilities for the buyer.
The use of markdown dollars is an example of a potential conflict between the buyer’s objective of meeting margin requirements and exceeding customer expectation. These are additional funds offered by vendors as part of negotiations and effectively guarantee the buyer a certain amount of their profit margin. Combined with their need to meet a profit quota, buyers have an incentive to choose vendors who give markdown dollars over their competitors. With his margin almost guaranteed, the buyer is motivated to buy a greater quantity than he otherwise would and contributes to a further misallocation of resources. A buyer could buy a thousand blouses from a vendor like Jones, sell two hundred at retail, take a large markdown on the rest and still make a profit.
Markdown dollars can enable a store to make margin in the short run without actually proving its skills at selecting and selling the right merchandise to its customers. However, the perennial appearance of clearance racks and ever-deeper markdowns pose their own risks and the store could build a reputation for poor quality, inflated mark-ups and cause customers to be suspicious of paying full retail.
More importantly, markdown dollars make buyers over-reliant on large vendors who can afford them and diminish the buyer’s motivation to perform the other half of his duties – the relentless pursuit of quality merchandise that might require searching among smaller, more specialized vendors. The venerable Lord & Taylor serves as a cautionary tale. Prolonged reliance on large vendors and a perpetual markdown model have reduced its presence in the high-end specialty retail sector. The result has been a growing homogenization of merchandise and a decline in the store’s tenor.
The rise of websites that aggregate merchandise across the Internet and the popularity of niche retailers like Opening Ceremony have resulted in a highly competitive retail scene. The onus is on established retailers to prove their relevance by providing merchandise that is unique. They can begin by prohibiting the acceptance of markdown dollars. This might make planned profit margin more difficult to achieve but in raising the bar for buyers, it would mark the first step in breaking the vicious cycle of steep markdowns and lowered customer expectations.