Application Aids Consumer Retail

Even with ROBUST forecasting applications, retail managers live with the knowledge that not every decision will be a winner. So what to do when left with all those winter hats, mittens and scarves?

In July 2000, Green Bay, Wis.-based ShopKo Stores began piloting Markdown Optimizer, a price optimization application from Spotlight Solutions in Mason, Ohio. The idea: Determine the price at which slow-moving discounted goods will sell while still making a profit.

“Retailers tend to get hit harder when there’s a turn-down in the economy. When that happens, there’s a renewed focus in looking under every stone for ways we can optimize what we have today,” says ShopKo CIO Paul Burrows.

Every season, ShopKo’s 141 stores are left with excess seasonal merchandise that they relegate to the clearance aisle. The stores have a date by which they must sell all of the merchandise so that they can make room for new products.

Burrows says the goal with clearance merchandise is to get rid of the goods without giving them away. “The more you sell during the first markdown, the fewer are left even if you do have to take a second markdown,” he says.

In the past, planners and buyers took on average four markdowns on apparel because they based their reductions on how similar products sold on clearance across the entire chain rather than at the individual store level, Burrows says. They might start with a 25 percent discount on swimwear, then three weeks later take a 40 percent reduction, then 60 percent until the last bikini was gone. It cost ShopKo 18 cents every time a store clerk marked a new price, according to Burrows.

Furthermore, the company was taking those markdowns on merchandise across the entire chain, regardless of whether the goods were actually selling in individual stores. That reduced the company’s margins on that merchandise even more.

Though not perfect in its recommendations, Markdown Optimizer is a lot more scientific. Burrows says ShopKo feeds the application weekly sales data by store and by item from its merchandise data warehouse. The application processes the sales effect of its past markdown recommendations and bases future recommendations on that data.

ShopKo saw a 24 percent increase in its gross margin dollars on the clearance items it tracked during the pilot. That’s better than Burrows expects to see with a wider rollout. “We’d be happy if we were in the 10 to 15 percent range,” he says. A 15 percent increase in gross margin would mean adding up to $15 million to the bottom line on sales of $100 million worth of clearance items. And that adds up to a lot of mittens and gloves.