Where will margin end? | IR News

Where will margin end?

Posted Date: 05/07/2012

By Stuart Bennie

What are we breeding?

Australian retailers are creating a margin climate which is unprecedented.

The swing ticket below says it all.

price tag

The original selling price was $59.99. It was marked down to $39.99 and then to $19.99 – this time with a nice garish red sticker. The final price paid at the POS was in fact $13.95 or 77% off original selling price.

Then there is this sign standing prominently in the doorway of a fashion chain in mid June.

So what are we teaching our customers - and will we ever recover?

The Australian customer in the good old days, was always too polite to ask for a discount. Now we have emboldened and empowered them. You will hear them asking for additional discounts (and often getting them) off already marked down goods. They have been conditioned. They do not expect to pay full retail any longer.

It is a waiting game. Just time it right and the discounts will start flowing.

The question is whether there is any recovery from this position that retailers have put themselves into. The manchester business has long since gone feral and it is rare these days to pay full price for sheets and towels.

Will other areas follow? Has the customer suddenly cottoned on to unrealistic input margins? Has the time arrived for retailers to apply reasonable input margins and then markdown more conservatively? The matter of input margins was addressed in a previous article in these columns – Where will margin end?

Are we witnessing the beginning of the end?

A spin off of the high input margins is the excruciating “death by discounts”. In the example above $60 to $40 to $20 to $14. The old adage “your first markdown is your best (or cheapest) markdown” seems to have flown out the window, partly because there is so much margin to play with. (For more info Google ‘first margin is the cheapest’).

If the retailer in the above example is applying an input margin of about 80 per cent, it is no coincidence that the realised price on the item just covered the cost.

The question is if the first markdown had been 50 per cent (or $30) would a lot of merchandise have moved necessitating only the dregs being thrown out at say $15?

Or if the first markdown had been taken earlier would the GP have been higher overall. Or if the input margin had been 60 per cent (Retail $30)... which brings us to the margin vs volume conundrum. We will never know in this instance but the theory of early and meaningful markdowns being the ‘best’ is generally accepted amongst experienced retailers.

Stuart Bennie is a retail consultant at Impact Retailing www.impactretailing.com.au and can be contacted at Email Stuart.

Keywords: Stuart Bennie, margin

Comments:

Friday, July 06, 2012 by willow

If only businesses and consumers could pay a fair amount that also meant the person actually producing the product received a fair wage instead of a slave wage.
While margins are so ridiculously high and consumers know it, they will wait for a discount.
Perhaps with some eduction and labelling of fair trade products along with respectable margins that still reward the business owner, we could create a win/win/win for all 3 persons involved in the transaction.
Also a good idea to avoid purchasing from multi-nationals. They employ kids in sweat shops for a few cents an hour... no one wants to contribute to that kind of cruelty.

Friday, July 06, 2012 by terry

The overwhelming issue is Australian retailers do not understand brand equity. They are willing to spend a minimum to position and differentiate themselves and then undo all of that by boldly promoting their discounts thus turning their brand into a commodity.

Brand - equity = commodity. This is the story of Australian retail.

Friday, July 06, 2012 by luke r

The insanity of paying $100 for something that cost less than $2 to produce is coming to an end. This is a good thing. Clothing prices have been irrational in Australia for years and years. Anyone who travelled overseas saw it first hand. Now the internet is bringing the truth into the living rooms of every household. The first thing that has to happen is for Landlords to realise the world has changed and that rents need to fall DRAMATICALLY.

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