Markdowns

Price changes. Retailers would prefer to sell most goods at the

original retail price.However a decrease or an increase in prices is sometimes necessary to provide successful merchandising options.

1. Markdowns 2. Markdown cancellations 3. Additional markups 4. Markup cancellations 5. Employee discounts.

Markdowns

It is the lowering or reduction in the original or the previous retail price on one item or group of items. For example a sweater that was retailed for $15 when it was received in the store was reduced to $8.75 because it became soiled. This price adjustment is called markdown because the retail value of the merchandise was lowered.

The difference between selling price and former price is the amount by which the retail value has been lowered. Frequently a merchandiser will want to calculate the markdown % that was necessary to sell a group of items, and when this occurs, it is expressed as a % of the net sales

The Purpose of Markdowns

The major aims of reduction are: to stimulate the sale of merchandise to

which customers are not responding well. To attract customers to stores by offering

‘bargains’. To meet competitive prices.

Causes of Markdowns1. Buying errors

overbuying in Quantities.buying of wrong sizes.buying of poor styles, quality,

materials and colors.poor timing in ordering of goods and

receiving merchandise later than ordered.

Causes of Markdowns2. Pricing errors.

setting initial price too high.not being competitive in price for the same goods.deferring markdowns too long.(failure to rep-

rice merchandise correctly- postpone the markdown to a time when merchandise will have lost most if not all of its potential value.At this point the markdown will be far greater than it would have been if the buying error would have been rectified through an immediate price reduction.calculated risks of carrying “prestige” merchandise

Causes of Markdowns3. Operational errors.

poor stock keeping on the part of salespeople and failure to

maintain a periodic checkup of slow moving items.

careless handling resulting soiled and damaged goods.

failure to display merchandise properly.uninformed sales people.

4. Special sales from stock(promotions e.g. buy 3 for same price of one $1.00)

5. Broken assortments,remnants(cut piece).

6. Necessary price adjustments.

7. Remainder from special sales or promotions.

Causes of Markdowns

Timing of Markdowns

Merchandise becomes slow selling The customer demand is sufficient to sell

the merchandise with minimum price reduction.

The customer’s interest in the merchandise in stock may diminish because of the appearance of new fashion, product, or a lower price.

The Amount of Markdown Judgment is required in determining the price at

which items can be cleared quickly. The re-pricing of goods is a major factor in the control of markdowns. It is difficult to generalize on the amt of the markdown to be taken because the right price depends on:

The reason for reduction The nature of the merchandise The time of the selling season The quantity on hand The original markup

Following rules can be considered in Re-pricing The first markdown should be sharp enough to

move a considerable amt of the goods. Markdowns should be sufficiently large to be

attractive to customers who rejected the merchandise at its original price.

Small markdowns are ineffective. Markdowns should not be so large as to invite

suspicion.

Markdown% $ Markdown = Previous price – New, Reduced

price

Markdown % = $ Markdown

------------------- x 100

Net sales

Example 1 The designer dept received 4 dresses in style

1436 that retailed for $200. All 4 dresses were reduced to $140 before they were sold. What is the markdown % on this style?

Markdown $ = previous price –new reduced price = 4x($200 -$140)

= 4x60 = $240Markup% = 240/ 560 x 100

= 42.86%

Example 2 The net sales for a dept during the month

of June were $28,000 if the markdowns for the June amounted to $7,280. What was the markdown %

MD%= 7,280/28,000 x 100

=26%

Example 3 Determine the net sales if markdowns for

May were 30% of net sales and markdown amt was $5,400?

Net sales = 5400/30% = $18,000

Problem 1 Last year markdowns for case goods in a

design shop were 15.5%. If markdowns amounted to $84,475. Determine the net sales?

Markdown Cancellations Frequently merchandise is reduced for a special

sale , and after the sale is over the remaining goods are returned to or toward their original price. This upward price change on merchandise previously marked down is cancellation of a markdown.

Markdown Cancellation is the upward price adjustment that is offset against a former markdown.

Net Markdown Net markdown = Total markdown –

markdown cancellation

Net markdown % = Net markdown ------------------- x 100Actual sales

Example 1

For a midnight sale , 24 blazers were reduced from $80 to $60. During the sale, 14 blazers were sold. After the remaining 10 blazers were remarked to the original $80 price. Determine the total markdown cancellation?

Total markdown 24 blazers x (80-60) = $480

- markdown cancellation 10 blazers x(80-60) =- $200

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net markdown = $280

The buyer for the music shop received 200 CDs priced at $15.95 each. 50 CDs sold at this price. The remaining CDs were marked down to $11.95 for a special sales event . During the sale, 85 CDs were sold. After the sale the buyer re-priced the remaining CDs to $14.95 and sold all of them.find (a) Total Markdown (b) Markdown cancellation (c) Net markdown amt (d) Net markdown percent

Total markdown(prior to the sale)50 CDs reduced from $15.95 to$11.95

total markdown = 150x ($15.95 - $ 11.95) = $600

Markdown Cancellation( after the sale) 65 CDs were repriced to $14.95

markdown cancellation = 65 x ($11.95 - $14.95)=65 x $3.00 =$195

Net $Markdown = total markdown – markdown cancellation

=$600 - $195 = $405

Example 2

Example 2To find net markdown %, we need net sales.

sales prior to sale = 50CDs x $15.95 each = $ 797.50

sales during sales = 85 CDs x $11.95 each = $1015.75

sales after the sale = 65 CDs x $14.95 each = $ 971.75

----------------

Total sales $2785

Net markdown % = net markdown amt / total sales x 100

= $405 / $2785 x 100

= 14.54%

Problem 1 A buyer reduced 62 shirts from $28 to $20 for a

special three day sale. During the sale , 44 shirts were sold. After the sale the remaining shirts were priced at $25 each. Determine the markdown cancellation.

Problem 2 A buyer reduced 42 jackets from $85 to

$60 for a one day sale . 40 jackets were sold during the event.after the sale. The remaining jackets were marked up to $75. All the jackets were sold at this price. find

(a) The markdown cancellation and (b) net dollar markdown?

Additional Markup

Additional markup is a price revision that increases selling price above the initial retail price.

An additional markup is used to correct an error made by the buyer or by the marking room personnel, which resulted in the initial price being marked too low. Another reason for an additional markup is to increase retail to coincide with an increase in cost . An additional markup might be taken on merchandise already in stock when reordered merchandise is retailed at a higher price. Most dept and specialty stores want to avoid the confusion that occurs when the same style is marked at different retails.

MarkUP Cancellation A markup cancellation is a downward price adjustment

that offsets the original or additional markup. It is used to adjust the markup on the purchase in accordance with the original intent and is not to be used to manipulate stock values. By definition a markup cancellation never exceeds the amount of additional markup applied to an item.

Some stores do not recognize markup cancellations and classify all downward price changes as markdowns. Markup cancellations are infrequent, except in highly promotional dept /stores. Stores that do allow markup cancellations must be very careful in determining which downward revisions are markup cancellations. The cancellation of additional markup should never reduce the retail price lower than the original price.

Price change proceduresEfficient system of reporting and recording price changes is

important for three reasons: price adjustments can be reviewed; so that the calculation of inventory records is accurate; that shortages may be determined.

Authorizing Price ChangeBuyer or person authorized by buyer. Merchandising manager.

Recording of price changeform should indicate the old price, the new price, the

quantity reduced and the reason why

Price change procedures

Recording of price changeRecording of form by buyer or person

delegated by buyer.Requiring signatures on price form of buyer or

person delegated by buyer,merchandise manager or market of merchandise.

Changing price on tickets. Distributing copies.

One copy to statistical department.One copy for dept records.

Every price change has an impact on gross margin and net profits. Since the elimination of adjustments in retailing is impossible, it is necessary that stores classify each type separately that they can be analyzed, planned and controlled. Markdowns the major type of price change reduce the retail price, causing a decrease in the gross margin which is further reflected decrease and /or elimination of profit. In certain merchandise or classifications, the markdown risk is frequently anticipated. It is offset by planning a higher initial markup.

The Relationship of Re pricing to Profit

Initial retail value

of merchandise sold $105,000 = 100%

-cost of goods sold -- 71,000 = 67.6%

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GM(initial markup) $34,000 = 32.4%

- operating expenses --25,000 = 23.8%

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Net Profit $9,000 = 8.6%

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The total retail reductions for the period are $5000:

Net sales $100,000 = 100%

-cost of goods sold - 71000 = 71%

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GM(maintained markup)$29,000 = 29%

- operating expenses -- 25,000 = 25%

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Net Profit $ 4000 = 4%