Where will margin end?

What are we breeding?

Australian retailers are creating a margin climate which is unprecedented. 

The swing ticket below says it all.

price tag

The original selling price was $59.99. It was marked down to $39.99 and then to $19.99 – this time with a nice garish red sticker. The final price paid at the POS was in fact $13.95 or 77% off original selling price.

Then there is this sign standing prominently in the doorway of a fashion chain in mid June.

So what are we teaching our customers – and will we ever recover?

The Australian customer in the good old days, was always too polite to ask for a discount. Now we have emboldened and empowered them. You will hear them asking for additional discounts (and often getting them) off already marked down goods. They have been conditioned. They do not expect to pay full retail any longer.

It is a waiting game. Just time it right and the discounts will start flowing.

The question is whether there is any recovery from this position that retailers have put themselves into. The manchester business has long since gone feral and it is rare these days to pay full price for sheets and towels.

Will other areas follow? Has the customer suddenly cottoned on to unrealistic input margins? Has the time arrived for retailers to apply reasonable input margins and then markdown more conservatively? The matter of input margins was addressed in a previous article in these columns – Where will margin end?

Are we witnessing the beginning of the end?

A spin off of the high input margins is the excruciating “death by discounts”. In the example above $60 to $40 to $20 to $14. The old adage “your first markdown is your best (or cheapest) markdown” seems to have flown out the window, partly because there is so much margin to play with. (For more info Google ‘first margin is the cheapest’).

If the retailer in the above example is applying an input margin of about 80 per cent, it is no coincidence that the realised price on the item just covered the cost.

The question is if the first markdown had been 50 per cent (or $30) would a lot of merchandise have moved necessitating only the dregs being thrown out at say $15?

Or if the first markdown had been taken earlier would the GP have been higher overall. Or if the input margin had been 60 per cent (Retail $30)… which brings us to the margin vs volume conundrum. We will never know in this instance but the theory of early and meaningful markdowns being the ‘best’ is generally accepted amongst experienced retailers.

Stuart Bennie is a retail consultant at Impact Retailing www.impactretailing.com.au and can be contacted at Email Stuart.

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