EVERY RETAILER’S “SECRET” EXPENSE–
HOW MUCH IS IT COSTING YOU?

By: James Hallman

Every retailer has an expense that doesn’t even show up as a “line item” on your P&L- and it is probably COSTING YOU MORE THAN YOU ARE PAYING OUT IN RENT!

This expense item is both a blessing and a curse. We need it, and we should use it judiciously. But use it indiscriminately, or dependently, and it will cost you a fortune.

I’m talking about markdowns. Discounts. The “price incentives”, or bribes, we give customers for taking it off our hands.

Do you realize that a 20% discount off the original retail becomes an expense of 25%? Here’s the math:

An item is priced to retail at $100, cost is $50.
Sell it at full price ($100), sales are $100, markdown expense as a % of sales is “0”.
(0 divided by $100 = 0%)
Take a $20 markdown on the item, and sell it for $80, sales are $80, the markdown expense is 25%
($20 divided by $80 = 25%)
[Now, how much is your rent as a % of sales? Can you check your markdown expense as quickly as you can check your rent expense?]

A markdown is any reduction in the retail price after the merchandise has been received into stock. The difference between the new selling price and the old selling price is the dollar amount of the markdown.

Markdowns are a vital tool, an effective way to get rid of merchandise that has proven to be unsaleable at the current price. Effective markdowns stimulate sales and preserve profit. Markdowns should be taken as soon as the selling activity on an item reflects customer resistance to the item at that price The cheapest markdown is one taken early- merchants have to keep a sharp eye on the movement of goods to exercise the best judgement.

Normal markdowns are healthy and we do need the gross margin dollars generated by markdowns to help pay the bills. But excessive markdowns can bankrupt a store.

Excessive markdowns are caused by little or no planning, overbuying, poor inventory management practices, and over-dependence on the word “SALE” to bring customers into the store.

If you are tired of markdowns stealing your profits- complete the form on our Contact Us page, and we'll talk about how you can put a stop to this excessive expense item.

To learn more about the impact of markdowns on profits, and to understand how important Initial Markup and Maintained Markup is to your business, download our retail math workbook at Retail Math .

ABOUT THE AUTHOR: James Hallman has over 40 years in retail management, both corporate and entrepreneurial. For the last 18+ years, he has operated The Hallman Company, a retail consultant agency based in Atlanta, Georgia. The Hallman Company specializes in bringing best-of-class services to best-of-class specialty retailers. Services include inventory planning with pre-calculated open to buy, and team management training.