Post-Holiday 2008 Clearance Dynamics

As important as the Holiday season itself is (undeniably), it's possible that the upcoming post-Holiday clearance process may prove to be even more important to the retail organizations. Clearance sales results are generally driven by three sets of variables: product, category, and macro-economic. Most of the time, that's the order of importance as well. The depth of discount and the timing of each price adjustment is most often linked to the product itself.
Product related variables also fall into three categories: initial pricing, overall demand, and trend targeting. By the time the clearance season starts, as a result of high levels of promotional activity and transparency to competitive pricing, most retailers probably know when they have priced an item too high. Let's rule that one out. Missing forecast due to lower actual levels of overall demand for a product generally looks like lower than expected but not horrible rates of sale during the pre-clearance season. In short, nothing in the market tells you that there's anything wrong with the item, you just own too much. This becomes a market share game at the product level, and price modeling will tell you to be aggressive early to capture as much of the limited demand as possible. Slow or reactive pricing will simply result in mediocre sell through and a generally lower GMROI. Trend targeting is the most corrosive of product level variables. If you are simply off-trend, there isn't much you can do to alter the value proposition until the price of the item gets to an extremely low point. In short, we're trying to appeal to those without trend knowledge, who don't care, or who are simply buying it for it's utility without regard to it's appearance.
Category variables are similar to Product variables except that they apply across the board, acting as an amplifier of the Product level behavior. As an example, when portable CD players were replaced by MP3 (OK, with iPods) devices, the entire category of portable CD players suffered from a huge overestimating of demand, brought on by being off-trend at the Category level. The cyclical nature of denim is another example. When denim is on a down-swing, almost ALL denim suffers. As noted, the impact of Category variables is to amplify Product level behavior. The important note here is that Category trumps Product. Even the "best" Product within an off-trend Category will NOT meet sell through expectations.

Most of this isn't news to anyone....and we have the experience, technology and rules based processes which serve for the most part to manage each of these scenarios.

What we do not have are models and technology which serve to manage macro-economic influenced consumer behavior. And the importance of this is enormous, because Economy trumps Category. Going into January, there are two competing schools of thought on what is really happening to consumer spending. One school argues that what we really have is primarily a psychological crisis in consumer confidence, and once this has settled, then spending will resume....albeit at a lower rate than originally expected. Still, we'll go back to "normal", just with a lower starting point. The other school argues that yes, we have a crisis in consumer confidence, and that it is driven by a real and significant reduction in overall net available disposable spend (which combines available credit with disposable income). This forecast argues that there is a new normal and that it doesn't look much like the old one. I'm going to call this the Deep Recession argument.

Probably the answer is going to fall in between those two points of view. Based on actual economic data in net available credit, actual real disposable income, savings rates and changes to the cost of existing credit, I am inclined to believe that Crisis of Confidence people are wrong.

So what's the point? If the Crisis of Confidence people are right, then clearance sales are going to exhibit "normal" behavior in terms of price elasticity and demand patterns....perhaps, even, showing faster than expected sales rates due to the pent-up-demand part of the Crisis of Confidence argument. If the Deep Recession argument is right, than none of the existing models, technologies or processes are going to manage the liquidation properly. I'll go into "why" that is tomorrow.

So what? Well, the "so what" behind this is that many retailers use clearance processes fed by business rules of some kind. The critical aspects of those rules are the length of the clearance season and the total sell through targeted. Rules established believing in the Crisis of Confidence should not be the same as those established believing in the Deep Recession. Essentially, the downside of rules based clearance processes is that incorrect modeling results in horribly inefficient pricing.

And as I'll note later in the week, how each retailer gets through the post-Holiday clearance season may have the single most important impact on their overall 2009 results......at the very least, will be the single most important part of managing the first half of 2009.