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‘Optimizing’ Markdowns by Computer

NEW YORK — With price cutting the biggest trend in retailing, stores are increasingly turning to new software to control the markdown mania.<br><br>Sources say Bloomingdale’s is close to signing an agreement with ProfitLogic Inc., a...

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NEW YORK — With price cutting the biggest trend in retailing, stores are increasingly turning to new software to control the markdown mania.

Sources say Bloomingdale’s is close to signing an agreement with ProfitLogic Inc., a Cambridge, Mass., technology firm pushing its “Pricing 4 Profit” software, part of a software suite for “merchandise optimization.” Pricing 4 Profit is already used at Northern Apparel Group, Casual Male Big & Tall, Meijer and J.C. Penney, across several categories. Home Depot has joined the crowd, though just for seasonal categories like lawn and garden and snowblowers, but not year-round products, like hammers and nails.

Bloomingdale’s will test the system, raising the possibility that its sister divisions at Federated Department Stores, like Macy’s, sign on as well. And last Monday, Gap Inc. announced it will use ProfitLogic’s software to determine when to take markdowns at its Gap, GapKids, babyGap and GapBody chains, after experimenting with it at the Old Navy division during the 2002 holiday season.

Pricing used to be by gut instinct, when retailers used to be able to wrap their hands around all aspects of their businesses. But the problem is that companies have opened too many stores in different climates and cultures to effectively determine when and by how much they should mark down the merchandise in each store, or whether they’re marking down too soon and losing margin.

Moreover, in some cases, vendors must guarantee margins via markdown money, or else retailers won’t buy the line, fostering the markdown mentality. But the new technologies are designed to help retailers tighten up, make more money and get a better merchandise flow.

Basically, the software developers combed retailers’ databases for historical results on products, blended in forecasting and used complex mathematics to arrive at formulas to predict how consumers will buy, and therefore, how to price the products, factoring out weather and seasons to gauge a “natural demand” for items.

Aside from ProfitLogic, other tech firms offering similar software include Khimetrics, SAS and Spotlight Solutions, and while software to manage markdowns is gaining popularity, industry experts believe the verdict isn’t in yet.

“There are numerous kinds of optimization systems from different companies and some retailers are using them, but there is not an industry-agreed-upon way to do it right,” said Cathy Hotka, senior technology consultant for the International Mass Retailers Association. “Some companies have achieved fabulous results one way or another, and if we can get to the point of standardization, it’s going to be outrageous. I think at this point, many of the retail customers who have used these technologies have raved about them, but no one assumes they have gotten the most out of it.”

From a manpower and operations point of view, nothing really changes at stores when they implement markdown software, according to Scott Friend, chief executive of ProfitLogic.

“The thinking that determines the markdown timing and depth is now enhanced by the computer and the analytics, not just the gut feel,’’ Friend said.

What’s involved in implementing these systems? Generally, $1 million or more in costs, as well as the time and labor involved in integrating them into the merchant’s existing systems, and a willingness to change processes.

The merchants and the merchandise planners use this system, so in some environments it could be a team. Typically, they would get a new set of weekly markdown recommendations highlighted on their computer screens and integrated with their other systems, and they press a button to execute the price changes at the point of sale.

Friend said certain ProfitLogic customers, such as Penney’s, are implementing similar solutions from ProfitLogic that extend the analytic value of Pricing 4 Profit into assortment planning and allocation processes, to make better buying decisions about assortment breadth and depth, and sizes, by store location. The firm’s overall suite of merchandise optimization includes the Buying 4 Profit and Allocating 4 Profit systems. It does not involve basic replenishing.

Even if the retailer is buying a new item for the first time, the system works, since it utilizes company history and mathematical understandings about similar products sold in the past, to forecast the optimal pricing procedures, Friend said.

“Implementation is very quick — 10 to 12 weeks,” Friend said. “It’s not a big MIS integration project, so retailers are often having ProfitLogic host the solution and literally start to get benefits in 10 to 12 weeks. The cost varies depending on complexity of implementation, but generally, the investment is over $1 million and we have yet to see a case where it doesn’t pay for itself in months.

“Department stores and specialty stores think it’s all about the merchandise. Fundamentally, it isn’t true. You have to leverage this kind of analytical technology to make more precise and profitable decisions.”

Michael Stanek, chief financial officer of Canadian specialty apparel retailer Northern Group Retail Ltd., contended in a statement that, “In the first week the software was in production, we generated $60,000 in additional gross margin on one stockkeeping unit in one store cluster. We were prepared to mark down the merchandise 30 percent, based on gut instinct, inventory levels and the product’s life cycle, but the software recommended the company ‘hold steady’ on prices. We followed the analytics-driven suggestion and reaped extra dollars.”

In another example, the company was ready to mark down a product in a region by 30 to 40 percent. “The software told us to hold off and we were able to generate $35,000 in additional gross margin — again, for that sku for that region.”

Once the chain had a product on reorder, the software warned that it would require an aggressive markdown to sell it. “It wasn’t a matter of what we had already invested that time,” said Stanek. “But we were able to cancel the order and save on our inventory costs…We plan to lock into other areas such as assortment planning and allocation optimization as we gain more experience with the software.”

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