Markdown
By: David Birnbaum (Consultant-Fibre2Fashion)
A markdown is the difference between the price on the hangtag and the average price received by the store after all sales and discounts.
Markdown is by far the largest garment cost. Serious negotiations between the retailer and the factory may lead to savings of 6-10% of FOB price. For fashion garments the markdown may equal 200% of FOB price.
Markdowns occur because the stuff does not sell. Markdowns are not across the board. The reality is that some styles sell-out in a few days while other styles sell not-at-all. More commonly, the pink, green, and yellow sell but the blue dies on the rack; or that the sizes M, L, and XL sells but not the S.
Markdowns are not the result of untalented designers and/or incompetent merchandisers. They are systemic and structural flaws in the system. To put is simply, markdowns occur because the way the industry operates invariably leads to markdowns. Not everybody, Some, like Zara have lower markdowns than others, while some like GAP have higher markdowns.
Markdown is what we call an extrinsic cost. In this case the problem belongs to the customer (retailer, brand, importer) while the solution rest with the supplier (factory). Those of us, who are convinced that the factory’s job is to simply make the garment (Cut & Sew), might begin to recognize that with some effort and new skillsets, they might be able to save their customer an amount well in excess of the total FOB price. The customer can reach the point where the factory is working for less than $0.
Part 1: The immediate question: What is behind the markdown problem?
In this regard, I am going to give you a tool. The Cost-to-Value costsheet. It is a way of quantifying change.
Every change carries a quantifiable cost.
Every change supposedly provides quantifiable value
Good decisions occur where the value is greater than the cost.
The cost-to-value costsheet quantifies both side. In this instance:
- The total cost and profit as it exists today: Normal Markdown
- The total cost and profit as it will exist once we determine how to reduce markdown.
The numbers - FOB $10, commission 5%, Markup 75%, Markdown - are realistic but arbitrary.
Cost-to-Value Costsheet: with or without Markdown Reduction Services |
|||||
Normal Markdown |
Factory Reduced Markdown |
||||
Factors |
Cost |
Cost |
Factors |
||
1 |
Material |
$6.00 |
|||
2 |
Trim |
$1.00 |
|||
3 |
CM Labor |
$0.64 |
|||
4 |
CM Overhead |
$1.86 |
|||
5 |
Added FOB Cost |
$0.00 |
|||
6 |
Added FOB Cost |
$0.00 |
|||
7 |
CM Total Cost |
$2.50 |
|||
8 |
Total Factory Cost |
$9.50 |
|||
9 |
Added FOB Profit |
$0.00 |
|||
10 |
Added FOB Profit |
$0.00 |
|||
11 |
Profit |
$0.50 |
|||
12 |
Total FOB Cost |
5% |
$10.00 |
||
13 |
Agent Commission |
5% |
$0.50 |
||
14 |
Freight |
$0.25 |
|||
15 |
Duty |
16.2% |
$1.62 |
||
16 |
Clearance |
$0.10 |
|||
17 |
Local Trsansport |
$0.15 |
|||
18 |
DDP |
$12.62 |
|||
19 |
Product Development Loading |
20% |
$2.52 |
||
20 |
Distribution Center Loading |
5% |
$0.63 |
||
21 |
In-Store |
$15.78 |
|||
22 |
Markup |
75% |
$47.33 |
||
23 |
Retail Price |
$63.10 |
|||
24 |
Markdown |
35% |
$22.09 |
||
25 |
Net Retail |
$41.01 |
|||
26 |
Net Profit |
$25.24 |
|||
The good news is that you need not search for data. You simply have to understand the process.
Markdown: Part II The Cause
Markdowns occur for a very simple reason: The stuff does not sell. Some styles sell out at once, while others sell not-at-all The blue and green sell well but the red and navy just die Sizes S and M loom good but sizes L and XL lay there
This may all be true, but it does not help us in our effort to understand and solve the markdown problem. One point is clear, the problem does not stem from untalented designers or incompetent merchandisers. The problem is systemic and structural.
Problems:
Long lead times: Traditionally the lead time from the first step DESIGNER DRAWS FIRST SKETCH to the final step STOCK GARMENTS ARRIVE IN-STORE may exceed 8-10 months. Clearly, no designer is so gifted and no merchandiser so prescient that they will know what will sell so far in the future. One thing is clear, given the long lead times cutting edge design becomes form of suicide, which leads us to the second problem.
Boring - Blah - Styles. Not only is the risk of cutting edge design too great, there is another equally important factor. Bricks & Mortar store depend on market share. Because each store operates at a fixed location, management wants to ensure that each style will meet the demands of the greatest number of consumers. The result is lowest-common denominator design.
Solutions:
As we saw in part I, this an extrinsic cost problem: The problem rests with retailer but the solution rests with the factory.
Only the factory can reduce leadtimes by providing the necessary services.
The first step: Move product development from the retailer side to the factory side. This solves a number of problems. In today’s industry, product development when carried out at the customer’s local office has become a most inefficient, costly and time consuming process
- The designer’s role begins and ends with the first sketch.
- The work passes to the technical designer who develops the measurements (Spec Sheet) and the making instructions (Tech Sheet), which can alter the original design
- A sample is made
- The work is then sent to overseas buying office who has to determine QA - can the factory actually produce the garment according to the sample. If not, the garment must be modified to meet the factory’s limited ability.
- The factory makes the preproduction (1-4+ attempts) until it is approved by the buying office.
- The customer’s merchandiser must then ensure that the factory FOB price meets his/her target. If it fails, the style is returned to the Tech Designer who changes the style, yet again. Long sleeves become short sleeve which becomes no sleeve.
For the purpose of markdown reduction, product development must be moved from the customer to the factory where working together with the designer lead times can be reduced from months to a few weeks — provided the factory can provide the necessary services. This factory/designer partnership provides fast quality results, QA problems disappear because if the factory makes the sample, we can expect them to make the stock. FOB price negotiation can be kept to a minimum because the garment can be engineered by the factory and designer to meet the customer’s target.
The second element of markdown reduction is speed-to-market. If production time can be limited to 6-8 days rather than 6-8 weeks, the style will arrive at the store when the design is still cutting edge.
There are three elements
Fast Turn: The movement of the initial orders quickly
Quick Response: The movement of reorders quickly
Trial orders
This last is of great importance because it allows risk-free cutting edge design. The factory ships a small quantity of the style to the customer for distribution to target branch store. 4-5 days after arrival, the customer knows if the style is marketable.
Most importantly, ability to reduce markdowns lies with the factory. As a result this is the most valuable service the supplier can provide.