Forecasting Clearance Sales

Although it is only early November, the current rate of aggressive promotions should be calling into question existing clearance methods and tactics. With the focus on NOW (meaning tomorrow's 6 hour sale) and surviving Holiday, it's likely that a re-examination of the intended clearance cadence and progression haven't happened yet. It's a good time to do that. Each promotional change made now has a distinct impact on the depth and timing of the markdowns which will be taken post-Holiday.

Yes, the intent now is to limit the post-Holiday liability by selling as much as possible at higher prices. Nothing earth shattering in that observation. However, if the original promotional plan initiated at 25% off and progressed to 40% at it's low point, then a first clearance markdown price of approximately 33% of would still be considered appropriate. Given that we've already seen 40% off in October and are experiencing 50% off in November, what implications will that have for January? In order to effectively re-think clearance planning, we've got to start with examining what promotions are actually doing in-season this year.

Traditionally, promotions are intended to stimulate the consumer to buy at a specific time, and don't necessarily increase the overall demand for a product....just shift that demand from a future point in time. Early season promotions in particular are not designed to overcome significant consumer apathy toward a given product. Rather, they are expected to help an already predisposed "looker" become a "shopper". As the season progresses, the price discounting deepens in order to draw from a wider and wider pool of potential customers....now, in effect, expanding demand. Still, the overall market isn't usually altered....just shifted from other retailers with less aggressive promotions. I believe that the economic downturn and evaporation of consumer credit have fundamentally changed the nature of in-season promotions this year. Instead of shifting demand from one point to another, the promotions are actually tapping into the "normal" clearance market.

Clearance sales have not, in the past, generally appealed to consumers predisposed to buy a product. Yes, there are the bargain shoppers of the first week or so who really did intend to buy an item and are willing to accept limited choices in order to save money. Progressive markdowns are taken as stocks break, and selections in size, pattern, or color become less attractive. However, a second paradigm is at work as well, seen primarily in non-fashion products. Here the sizes aren't broken, the colors haven't been cherry picked, and the what's left looks exactly like what sold earlier in the season. So why does the price have to keep dropping to stimulate demand? The purpose is to expand the demand pool by altering the value proposition. Even fashion goods are impacted by this reality.

This year, the predominant factor influencing price elasticity is the consumer's economic value proposition. With much less money available, only the truly "needed" items will hold most of their original economic value. Merchandise which has some appeal to the consumer, but is not actually "needed" will hold some value, but still require significant price adjustments to stimulate demand....or alter the value proposition. The impact on clearance is that for all intents and purposes, we will have already begun the progressive markdown process as early as November.

Implications for clearance planning are these. First, if you maintain a traditional clearance progression, anticipate deeper initial price cuts and faster progressive markdowns, even on merchandise where the only flaw is you own too much. Even with a faster cadence and deeper cuts, it's likely that the best estimate will be to match historic sell off patterns. Second, more innovative approaches to moving merchandise can and should be explored. BOGO's, bundling, and anything else unusual will be needed.

The macroeconomic condition is NOT going to get better by January. And all the efforts of all the retailers to move unanticipated over-inventory positions will NOT keep season ending inventories from exceeding plan. The general condition of fewer disposable income dollars chasing larger amounts of merchandise will remain constant in January.....except it will become even more significant. Clearance shoppers tend to come from generally two market segments. Bargain shoppers are those who don't really have to have a "need" for the product, but can be induced to buy on the basis of the "bargain" and the chance of possible future use. This requires some degree of disposable income which can, in effect, be spent without any immediate real-world benefit (the psychological benefit of finding a "bargain" is not typical of recessionary economies). Clearance-by-necessity shoppers are those who truly do need the merchandise, but haven't been able to afford it prior to this point, and who's living situation makes it necessary to actually wait. In short, they don't buy until the price drops to where they can afford it. Neither of these two groups is going to behave as they have in recent years.

Although best practice forecasting will have modeled sales and inventory through to liquidation, it is likely that the assumptions built into the clearance portion have not been subjected to rigorous analysis. The changes in consumer behavior have impacts on clearance results which can and should be anticipated.