The answer to this question is probably that you do not. But, you must be thinking about this topic. It’s about risk management and it has an important place in your upfront considerations on how many skus to launch with a retailer. And here’s why.
Backing it up just a second, just in case you do not know what I am talking about. Markdowns are what happens at retail when a product is discontinued. Different retailers treat markdowns differently in terms of length of time an item is marked down and who absorbs the cost of the mark down.
If you bring up this topic, it creates doubt in a buyer’s mind (ie. the buyer is then thinking to him/herself, why is she/he worried about a discontinued item?), even if this is a logical conversation that one should be having. And the reason you want to be having this conversation (even if it’s in your head and amongst your internal management team) is because when dealing with the larger retailers you are doing business based on a guaranteed sale (that means you are doing business on consignment – the retailer holds YOU responsible for whatever inventory does not sell). As such, you are financially at risk if your inventory does not sell. And this should play into your decision about how many skus you are willing to send to this retailer. And to how many stores. The greater the number of skus and the greater the number of stores, the greater your risk (and reward).
So, if you don’t have a conversation with your buyer upfront about how they handle discontinued items, you won’t know what percentage of the markdown you and the retailer may share (everything is negotiable), nor will you know how this retailer handles mark downs (i.e. does it happen or 30, 60 or 90 days). It’s hard to manage inventory and cash flow if you don’t know the answers to these questions. You should also consider what returns you are willing/able to accept (i.e. unopened master cartons, loose/single sku items). The cost of the returns may or may not be greater than participating in the markdowns once reviewing all costs (i.e. what is the retailer going to charge you to return these items to you vs what will it cost you to participate in the markdown).
Fyi: I have never had a buyer as part of our upfront negotiations bring up the conversation about markdowns/discontinued items. And, I would guess that most entrepreneurs don’t even know to ask or consider this question. For that reason, I want you to KNOW that this should be a part of your thought process and risk management evaluation UPFRONT. You don’t need to have the conversation with your buyer about all of this, BUT you need to know that it’s all a real possibility that your item could be discontinued. Shelf space is at a premium. Vendor and sku rationalization is always a consideration.