By Danny Paul
In the fourth installment of Danny Paul’s series on specialty store strategy, he looks at the evolution of maintained markup in the new economy.
Until the middle of 2008, beautiful merchandise drove sales and price didn’t seem to matter. But the world of luxury menswear has changed in a very big way in the last 40 months.
Many of the most successful stores today offer a value proposition in an eloquent way with six to ten well-executed promotional events over the course of the year, excluding seasonal clearance sales.
Like it or not, the consumer is being bombarded with the “buy one get three free” message day after day. These actions have reduced the perceived value and worth of men’s apparel. Specialty retailers must promote to drive traffic and let their customer know they understand what’s going on in their lives.
Executing several promotions over the course of the year requires a much higher initial markup than what stores took in years past. Retailers must have a high maintained markup (what’s left after markdowns) that’s roughly 8 to 10 points higher than their operating expenses. Example: if expenses are 47 percent of sales, you need a 57 percent maintained markup. If a retailer can accomplish that, and attain good turnover, say two times a year, you will likely have a profitable store.
Markup and maintained markup numbers have changed in a significant way over the past three years. The recession and the need to promote to get consumer response has changed the game. Once upon time, menswear retailers accepted an initial markup of 50 percent. Keystone was the word used. In those days, retailers could move slow sellers with a 10 to 20 percent markdown and customers lined up in front of the door the day the clearance sale started. Back then, a store had operating expenses in the 30 to 35 percent range and would run two seasonal clearance sales. A well-run apparel store could have a maintained markup of 44 percent and end up with a 10 percent pretax profit. How times have changed!
Today savvy retailers are looking for initial markup in the 65 to 75 percent range on much of what they buy. They have operating expenses in the 50 to 55 percent range and need to take 50 percent markdowns or more to move slow sellers. The consumer hardly raises an eyebrow when a 25 to 40 percent markdown is offered. We know retailers are adding more private label goods, much like department stores. The reason is simple: private label merchandise offers more markup and maintained markup opportunity. Private label goods are used during many of the events conducted over the course of the year.
Today the consumer is more concerned that retailers offer value. The other option is to ignore the economic realities of retail and maintain that upper-end snob appeal. The problem, however, is that retailers can’t bank on image. Image just confirms the fact that you don’t understand your customers’ reality.
It’s important that retailers know how much markup is needed to withstand markdowns and promotions. Attaining a markup high enough (65 to 75 percent) to withstand both promotional and clearance markdowns is a challenge because many retailers can’t generally get that kind of markup from core vendors. Retailers need to locate vendors that offer far bigger markup. They also need to keep OTB in reserve to take advantage of off-price offerings from their core vendors.
This past spring season we studied 50 better men’s stores across America. We carefully measured how initial markup, markdowns and maintained markup have changed in the last 36 to 40 months. Our findings were interesting: Even though sales have weakened, most retailers increased initial markup enough (by as much as 15 points) to offset much higher markdowns and many now have a higher maintained markup than three years ago. This was no accident. Many retailers are buying goods with bigger initial markup in structured clothing classes. Many have added new vendors and have taken advantage of off-price goods from existing vendors to a greater degree. There is no going back. Now retailers know they can locate desirable goods that offer a bigger initial markup and improved maintained markup. That changes the way they will buy going forward regardless of the economy.
I suggest you start to calculate your maintained markup on a rolling and annual basis each month. You’ll quickly learn how well you are doing against this critical measurement.
Initial and maintained markup
*The classes that attain markup in the 65 to 75% range: Suits, sportcoats, dress pants, sport shirts, neckwear
*Markup in the 60 to 65% range: Dress shirts, knit shirts, sweaters, jackets, outerwear
*The following classes pose the biggest challenge: Casual pants, jeans, shorts, belts, shoes
Danny Paul is the founder of Retail Communities and is a retail consulting specialist.
He can be reached at 714-777-6067, email@example.com or DannyPaulConsulting.com