Markdown money: It's just a bad idea

The sales rep puts the phone down. His hands are damp with sweat, his breathing is erratic, and his heart is beating hard. The buyer on the other end of the line has just told him that she needs markdown money. She needs a lot of markdown money.

Now he has to call his factory and tell them the bad news. The product has not sold through as expected, and the customer wants to markdown what is left of the inventory.

He braces himself, picks up the phone and puts it back down. His factory is going to be furious. He already convinced them to cut the price to the minimum in order to get the product placed. Now they are going to take a bath and they will blame him, which could mean losing his job. He picks up the phone, punches in the number and gets ready.

I don't know about you, but writing that sure made me tense. Any of us who have ever had to communicate that kind of bad news recognizes the anxiety. This is nothing, however, compared to the anger, frustration, suspicion, and even betrayal that goes through the hearts and minds of the factory executives who are confronted with this request.

Markdown money is a bad idea, and it is time to put it to rest. What has gone from a nuisance to a risk to a catastrophe, has now morphed into a scandal. The St. Louis Post Dispatch on June 27, 2005 reported that Federated Department Stores is facing a class action lawsuit by former vendors over the company's markdown claims. The New York Times on July 15 reported that Saks Fifth Avenue would compensate suppliers for $21.5 million in improper deductions—the fact that they are so forthcoming may, in part, be due to Saks being under a federal investigation.

What do clothing manufacturers and department stores have to do with the toy industry?

Everything.

They are both fashion industries with considerable risk attached to making the correct buying decisions. What is happening in the clothing industry could, therefore, be a harbinger of what may be coming to the toy industry. The toy industry—buyers and sellers alike—can use this foreknowledge to prevent a similar outcome. We, as an industry, need to work together in establishing “best practice” standards to eliminate or regulate the use of markdown money. Why? Its use and abuse is bad for everyone.

Markdown money removes the risk from the buyers and thereby blunts their instincts for what is good and bad product and how much or how little to buy.

Retailers who abuse markdowns pay more for the same product than those who don't.

• Manufacturers must charge more in order to cover the anticipated markdown. Retailers who abuse markdown money are less competitive than those who don't.
• Higher costs mean higher retails.
• Higher retails mean customers shop elsewhere.
• It strains and potentially destroys relationships with vendors who are depended upon to provide the retailer with the hottest products.

It's bad for salespeople because:

• They may lose commissions they had already banked.
• House salespeople may lose their jobs.
• Independent reps may damage their factory relationships and lose significant lines.

It's bad for factories because:

• They don't know how to engage in risk management and provide the lowest price.
• They can damage their business if they don't have sufficient funds to cover the markdowns.
• It strains and breaks their relationships with sales and buying communities. Until markdown money is sent back to whatever evil place it came from, there are precautions retailers and manufacturers may take to stay out of trouble.
• Retailers can provide detailed documentation of the inventory to be marked down. With today's advanced communications, retailers should be able to provide store-by-store accounts. If the retailer is not forthcoming, the factory has a right and responsibility to refuse to cooperate until it does.
• Retailers and manufacturers can work together in spot-checking stores to make sure accounts are accurate and that goods actually get out of back rooms and make it to the sales floor.
• If store checks raise questions, then both sides should take a statistically significant number of stores and match hand counts against retailer computer records. If the counts don't match up then both sides need to challenge the data. If it turns out that product did not get to the floor, was incorrectly priced, or hidden, the factory should not have to pay.
• If the counts check out, the items were properly merchandised and did not sell. A markdown should be discussed as a cooperative venture with the purpose to make both sides whole.
• After the markdown, the retailer must provide an accounting of how many items were sold at the reduced price and at what stores.
• Whatever happens, the buying and selling sides need to take a holistic view of the situation and devise a way of doing business that mitigates risk rather than shifts it. This creates an environment in which sellers take responsibility for the quality of their products and buyers take responsibility for their picks.

It's the way it used to work. It will work now.