Markdowns are when retailers discount a product to help move the product off the shelf and/or from their DCs. Most big retailers ask the supplier to help support a markdown when/if they discontinue the product from their assortment.
Markdowns are one of those necessary evils in the retail sector. Consumers love them (they get merchandise at a fraction of the cost). Suppliers hate them (they usually end up having to share in the markdown). And buyers rely on them (to reduce their risk of being stuck with product that then must be discounted to get it to sell more quickly).
A retailer can’t require you to share in the cost of a markdown; however, if you elect not to participate, you risk not landing the account because the retailer will likely not want to assume the risk of carrying your product that may not sell (or not sell well based on projections), and then be stuck having to sell it at a discount – on their dime – to move it off the store shelf to make room for another more lucrative product.
Like all things retail, everything is negotiable. And, markdowns are no exception. It’s best to have the discussion about markdown expectations upfront so the retailer and supplier are on the same page about what happens if/when the supplier’s product is discontinued and results in the need to markdown the product. Does the buyer expect you to fund the entire markdown, is he/she willing to split it 50/50, or some other spilt. Different retailers have different expectations. What can you afford? How much risk are you willing to assume to land this account? Are you willing to walk away if you can not agree to their request?
If you have not had the discussion with the retailer about markdowns upfront, and you then elect not to participate in a markdown, you risk damaging your relationship with this buyer. He/she will not see you as an equal partner and then be stuck fronting the cost of the entire markdown which hurts his/her bottom line – and impacts them at their annual review time with their boss. He/she will likely not want to carry any of your products in the future, or restock the same item if it could have been brought back during a following season.
As a supplier, I would strongly suggest that you consider markdowns as part of the risk of doing business. The larger the store count and/or the larger your sku count on the store shelf, the greater your (and retailers) risk. If the retailer discontinues your product, what is your share in the cost of moving this product off the store shelf?
Following are some strategies for minimizing risk:
- Manage inventory wisely. Don’t push extra inventory on a retailer. A huge PO is not necessarily a good thing. The PO should be based on what you and the buying team believe to be a reasonable inventory turn, which is supported by past sales data. If you feel that a PO is too large, that it doesn’t match up with your projected movement rate, have a discussion with your buyer. Find out their rationale for why they ordered what they did, see if that makes sense to you. If it doesn’t, then you have some talking to do with your buyer. They may have some promotions planned for your product that you were aware of, for example, where there is need for that extra product.
- Familiarize yourself with the retailer’s markdown timing. Different retailers handle markdowns differently in terms of what % off and when to implement that markdown (it might be done in stages – i.e. first markdown is 50% off for first month and then 75% off the following month). It’s best to understand your retailer’s timing so you know when you will need to help fund the markdown. If you have a credit with the retailer, they will deduct the markdown from invoice. If you don’t have a credit, they will expect you to pay them back. It’s best to understand when they will expect that payment from you.
- Buy back your merchandise. You always have the option to buy back the inventory rather than participate in a mark down. Or, you can elect to participate in a markdown at a certain % off, and then have whatever remaining product there is returned to you – on your dime, at a surcharge (remember, the retailer must have employees pull the product from the shelf/DCs and then ship it back to you. That costs them money so they are going to charge you to cover this labor cost). The question becomes: can you resell the inventory and make more money off of it as compared to participating in the markdown. Which one is more lucrative for you? The buyer just wants the product off the store shelf/out of their DCs. As long as you meet this need, you are keeping your relationship with your buyer in tact.