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Source:
"The End of the Sales Rack"
July 10, 2002
Guest Comment: The End
of the Sales Rack
ClientLogic's Channing Rollo argues that direct-to-store
fulfillment will save retailers millions in markdowns, overhead, and
lost sales.
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Channing
Rollo,
ClientLogic |
Attention, shoppers!
For those of you that love clearance sales, we've got some bad news: the
era of never-ending markdowns, midnight-madness sales, and
nothing-held-back clearance sales may be drawing to a close. Why?
Technology-powered direct-to-store (D2S) fulfillment is enabling retailers
and manufacturers to ship products to individual stores in an efficient
and innovative way. Retailers with direct-to-store capabilities can custom
pick and pack shipments according to each store's product demand, just as
they would a direct-to-consumer (D2C) purchase. This ability to handle
broken-case quantity means that D2S shipments include only the products
that are selling -- no more, no less.
For far too long, retailers
with case-based shipping warehouses have adhered to the inefficient
strategy of shipping identical cases of product to stores nationwide,
regardless of demographics. For example, imagine that identical cases of
ten golf shirts in x-small, small, medium, large, and x-large ship to 200
stores in 46 states. Depending on the weather, regional body-size
variations, and local dress style for each of these retail locations, the
golf shirts will sell out in some stores and populate the sales rack in
others. What results are painful markdowns -- which cost retailers 33
percent of sales, on average -- and stockouts, which cause lost sales
often exceeding 10 percent of revenue. But under a rapid-response,
direct-to-store model, retailers instead replenish (and, if necessary,
redistribute) products based on individual stores' point-of-sale (POS)
data, drastically reducing the number of store stockouts and
markdowns.
For far too
long, retailers with case-based shipping warehouses have adhered to the
inefficient strategy of shipping identical cases of product to stores
nationwide, regardless of demographics.
Retail Goes
for Broke
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Markdowns cost retailers more than $200
billion each year. - National Retail Federation
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Mismatches in demand and supply can result
in either out-of-stocks or overstocks. Out-of-stocks can quadruple the
number of lost sales; overstocks can lead to expensive promotions and
markdowns that are often as high as 90 percent. - AMR
Research
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Markdowns as a percentage of total sales
have increased from 8 percent in 1971 to over 33 percent in 1995, and
continue to increase today. - Harvard Business Review
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Customers have grown so accustomed to
markdowns that only 20 percent of goods are sold at full price, while
stockouts continue to let potential full-price sales walk out the
door.
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If the average retailer's pre-tax profits
are in the 5-7 percent range, then reducing markdowns by 20 percent with
D2S adds another 5 percent in sales to the profit
line.
Traditionally,
retailers have focused on design, promotions, innovation, and site
selection to gain market share. Large distribution chains offset financial
risk by demanding up-front fees from manufacturers to cover the
anticipated cost of markdowns. But as an entire industry feels the
burn, many are saying there has to be a better way. These retailers and
manufacturers are looking for a way to improve their ability to respond
and deliver based on customer demand. And they've just found it:
direct-to-store fulfillment.
Customers have grown so
accustomed to markdowns that only 20 percent of goods are sold at full
price, while stockouts continue to let potential full-price sales walk out
the door.
There's a Time
and Place for Everything
To meet and
exceed customer expectations with D2S, retailers must start by listening.
Demographic projections and point-of-sale scanners capture the customers'
voices straight from the store. The warehouse responds with continuous,
store-specific product replenishment, powered by fulfillment automation
and rapid logistics.
D2S fulfillment is based on the just-in-time
(JIT) concept: keep inventory in rapid-response warehouses (where
inventory is inexpensive to hold and easily redistributed) instead of in
stores (where inventory storage and redistribution are extremely costly
and difficult). By flowing goods according to demand from POS data and
customer records, retailers can save on expensive retail and mall space.
Moreover, the JIT characteristics of D2S mean retailers can reduce their
in-store back-stock area, which is very pricey as non-revenue generating
space.
Super Model
Benefits
The primary benefit
of the D2S model is simple: shortening the delay between indicators of
customer demand and the arrival of the wanted merchandise. D2S enables
retailers to:
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Ship based on store requirements,
demographics and POS data (ship what is selling -- replenishment, or
"pull" instead of "push" shipping)
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Reduce stockouts on popular merchandise
(lost sales)
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Reduce markdowns and overstock merchandise
disposals
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Adjust store inventory assortment with
ease; redistribute inventory across store chain
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Reduce retail space and back-stock space
expenses
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Delight customers by consistently meeting
demand with in-stock favorites
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Improve percentage of products sold at full
price
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Capitalize on flexibility: ship to stores
daily, twice-weekly, or weekly based on sales requirements
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Coordinate time-sensitive promotions,
advertising, and complementary products with rapid-response
fulfillment
Do You Want a
Revolution?
With hundreds of
retailers awash in red ink, struggling to maintain margins against global
competitors, stores can no longer turn a blind eye to the problem of
markdowns and stockouts. These inefficiencies -- directly rooted in
case-based fulfillment -- are costing precious retail profits.
Replenishment-driven,
highly responsive direct-to-store fulfillment enables retailers to respond
immediately to demand changes and delight customers with in-stock
favorites. D2S is a recipe for store-level success: store-specific
shipping enables micro-marketing and better satisfaction of local customer
demand. Retailers have long known that "one-size-fits-all" apparel ends up
only fitting a minority, while frustrating the majority. So why is it that
retailers continue to take this ineffective approach to store fulfillment?
It's time to strategize, customize, and realize that direct-to-store
fulfillment is the key to regaining profits at stores and retail chains
across the nation.
Channing Rollo is the Business
Intelligence Manager at ClientLogic.
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