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Mania for Markdowns: Consumers Get Benefit, But Vendors Squeezed

Retailers turn to resources to help shoulder responsibility.

With 30, 40 and even 50 percent off signs rampant throughout apparel departments, and newspaper ads and Web sites touting major sales, it’s no wonder retailers are hitting up the vendor community for markdown money even earlier than usual — and for greater amounts.


As the fall selling season turns into one of the most disastrous on record, because consumers virtually stopped shopping in October, retailers have been forced to cut prices at least a month earlier than usual. Neiman Marcus, for example, offered 40 percent off all merchandise throughout the store for several days in late October, went back to regular prices and then resumed major sales of 25 to 40 percent throughout women’s designer, couture, contemporary and career sportswear this past Saturday; Macy’s is offering 25 to 50 percent off storewide through Veteran’s Day; Saks Fifth Avenue gave 20 percent off to “friends and family” in mid-October and has been selling many of its contemporary sportswear lines at 40 percent off and Bergdorf Goodman’s Web site touts “Save as much as 40 percent off.”

As a result, retailers have become much more aggressive in asking vendors to help shoulder the responsibility for merchandise that’s not moving off shelves. In fact, some resources said retailers are asking for at least 20 to 25 percent more in markdown money this season, and nearly three months earlier than what are typically post-Christmas requests. In addition, several stores are canceling some of their fourth-quarter orders.

An executive at a midtier vendor, who requested anonymity, confirmed that Macy’s Inc. had started asking for holiday markdown money in October — a conversation that typically occurs in early January. Macy’s declined comment.

“I’ve never seen it this way as far as the retailing environment is concerned. Stores coming in earlier, absolutely, but I settle up at the end of the quarter, not during. The amount they are asking is more — 20 to 25 percent higher than last fall,” said Warren Donner, president of WD-NY, a better sportswear firm.

“Stores are asking for cutbacks on fourth-quarter orders, which is when stores do most of their business. Stores are asking for anything the vendor will do for them, but they have to take some sort of responsibility. I’ve shaved a percentage (off the size of the deliveries) or given them a better price point,” said Donner.

One contemporary vendor, which sells to department and specialty stores and requested anonymity, expressed frustration with retailers because of the massive markdowns.

“Of course retailers are requesting markdown money and more than ever,” she said. “Third-quarter sales have been sluggish and what is attracting the consumer to buy is an incentive in the form of a markdown, which ultimately results in lower profit margins. This, in turn, directly affects their efforts to drive sales. Even though the economy is slow, the stores have not reduced their margin expectations.

“This is very difficult on the manufacturer and very frustrating. Ideally, we would partner with our stores and provide a generous amount of markdown allowances, but we are all living in the murky waters of an economic downturn. Most stores are still pushing for even higher amounts of markdown money, and this puts a high amount of pressure on our margins,” she explained.

But, she said, the markdowns issue isn’t the only one impacting business.

“We are getting squeezed from all sides. On the manufacturing front, raw materials costs are rising as well as for labor and transportation. This in turn makes it challenging to provide the kind of starting margins one needs to run a business. To add, stores are asking for lower prices than last year. On top of all these challenges, markdowns are higher than usual and our retail partners are requesting more money than in the past,” she said.

But market experts say stores don’t have much of a choice.

Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates, explained that earlier requests for markdown money “is the logic of what’s going on in this crisis.” He said former Federal Reserve Board chairman Alan Greenspan called the economic crisis a “tsunami” and something that happens once in a century.

“Stores have to be more price-promotional earlier in the game and have to be sensitive to customers’ needs,” said Aronson. “From mass to class, everybody’s cutting back on their purchases.” He said stores don’t want to be the last ones doing something about it. “There has to be an acceleration of that conversation to have a practical partnership,” he said.

Aronson predicted “the most challenging year in several generations of retailing.” He said it’s necessary for retailers and vendors to “co-op” during good times and tough times. The industry has a combination of tools, one of which is markdowns on existing inventory, another is cancellation of goods, and the third is going into off-price channels. “Each side has its pressure point. There has to be a co-opting of risk,” he said.

Michael Culang, president and chief executive officer of Hampshire Group, a predominantly moderate knit company, observed, “In every conversation we have with a retailer, there’s a recognition that these are very different times; it’s not business as usual. Most of our conversations have been on a higher level about partnership.

“We always work on a quarterly basis, and I didn’t sense markdown requests were earlier than usual. But the requests were 10 to 15 percent bigger. The acid test will be in January when the holiday season is done,” he said.

“Some retailers have cut back their fourth-quarter orders, but we’ve been able to find a home for the merchandise because we had such a broad base of accounts whose buy plans were so conservative they are finding they actually need goods,” said Culang.

A few vendors say they’re planning differently in light of the dismal economy.

“Despite having to give back some money in markdowns, we have strategized our business a little differently in preparing for the upcoming holiday season. We are offering our merchandise at a cheaper price point to our buyers so they can in turn lower their retail prices in their stores and sell it quicker,” said Jamie Gorman, president of Only Nine, a moderate vendor.

“Being a key domestic vendor, we are able to ship fashionable, trendy merchandise quickly to the stores so our buyers don’t miss a beat. We expect this season to be one of the worst. However, we are stable with our bookings. We are finding a lot of buyers are in need of quick merchandise. Perhaps most stores held back and were scared to take a big position in inventory, but now they need fresh new goods,” said Gorman.

“We are also finding that a lot of the big retailers are restructuring their buying and are buying more promotional programs for their stores. We recently received a 50,000-piece program for a large-size retailer at a cost of $7.50 with a retail of $15.99 in their stores,” he said.

Vendors believe many stores had already started planning leaner inventories because the whole year has been difficult.

Bud Konheim, president and ceo of Nicole Miller, said, “Forget the economic crisis that is going on right now. Business was already not great before that. Everyone had to put their helmets on and cut back. Running a sensible business can’t be based on getting some markdown money,” he said. “Everyone we do business with doesn’t have giant inventories. They buy right in the first place and we don’t oversell them. We’re just very conservative on the sales side.”

Conversely, markdown allowances are not predictable. “It’s not within your power if someone comes back to you because they are running business badly. Maybe they took in a whole other line that they put next to your line and put that new line on sale,” Konheim said.

“Our business is not so big. It’s a conservative business. It’s just not our thinking to go do business without being aware of the consequences of overselling,” he said.

Lou Breuning, president of HMS Productions Inc., a predominantly better knit vendor, added, “Markdown dollars go up only because our volume has gone up, and our percentage of markdown money has actually been running a little less. We have had one or two retailers who have wanted us to take a look at their on-order, but there are other people who had been very cautious about their placements so they are now asking for more. One thing is wiping out another. The only thing that has changed for the fourth quarter is the inventory that we’ll be carrying. We’ve been bracing for the worst, which for us never happened. We could probably have done more business if we’d been more inventory-rich, but we wanted to protect ourselves.”

A contemporary vendor, who requested anonymity, said his retailers have not yet asked for markdown dollars, however, the vendor knows they’re coming.

“Department stores had already taken a more conservative approach with their budgets for fall. With that said, we still did not foresee the intensity of the recent downturn in the economy. Nothing could have prepared us for this,” he said.

“The entire shopping experience is being ruined, by the early sale break dates that we are seeing this season,” he said. “Who needs to buy at full retail when goods are on sale for 40 percent off by Nov. 1?”

Bob Grayson, founder of The Grayson Co., a retail consulting firm, said it comes down to partnerships between vendors and stores.

“The real story is not about when markdown dollars are requested or how much or whether cancellations should happen. The facts dictate that markdowns must be taken to clear the excess inventories created by the last two months of disastrous sales results. And there is more merchandise on order than can be sold during the anticipated dismal holiday season, which dictates cancellations. Therefore, the discussions between the stores and the vendors which revolve around justification for markdown support and cancellations are out the window. No one saw this coming,” said Grayson.

“The story here is about whether stores and vendors will have the good sense to hold hands, work together to get through this and come out as survivors or whether they will let greed and self-survival take precedence over mutual support and fairness. No party involved whether vendor, store, factory, component supplier, etc., should be entitled to make money on goods that would not have been on order had the financial crisis been forecast. It is a time for support, cooperation, and sharing the burden fairly, not for ugly negotiations and lack of consideration for partners. The season’s results and their impact on companies throughout the industry will tell us whether we as an industry are capable of dealing effectively with real crises or are so mired in corporate financials and public reporting that we couldn’t save ourselves.”

Allan Ellinger, senior managing partner at Marketing Management Group, viewed the situation from the vendor’s perspective: “The pressure is unbelievable. I know people who are saying, ‘I’m not giving them any more. I’m losing the account.’ They can’t afford it. They’re trying to take blood from a stone.”

Ellinger said the vendors are paying increased costs to procure product, financing costs are going up and the pressure is mounting. “They’re trying to do it on the back of the vendors. The amount of markup that a retailer works on is 54 percent or higher, which is significantly greater than what the vendor is working on. What I’m hearing from clients and friends in the industry is they’ve given as much and as long as they can, and they’d prefer to lose the account,” he said.