© 2013 IBM Corporation

Boosting Margins with Analytics-Driven Markdowns

Delisting / end of life product

Delisting / end of life product

What drives the need for markdowns?

Bad buying decisions

Bad buying decisions

OverbuyingOverbuyingPoor timing of deliveries

Poor timing of deliveries

Long lead times (difficult to reorder)

Long lead times (difficult to reorder)

Merchandise duplication

Merchandise duplication

Short lifecycle(shift stock before next season)

Short lifecycle(shift stock before next season)

Priced too high

Priced too highInaccurate

forecastingInaccurate forecasting

Seasonal & short-lifecycle merchandise has additional challenges

Pre-season forecasts only provide direction• Predicting demand for the entire season months in advance• Typically based on same season last year but trends,

fashions, styles and items changeIn-season reordering not always an option

• Overseas sourcing and long lead times• Orders received in one or two shipments

The opportunity for making better informed markdown decisions is significant

“Our market research indicates that markdown optimization can capture 5% to 15% of revenue subject to markdowns as virtually free incremental margin.

For example, a $1 billion retailer with 25% of revenue from markdown sales should be able to generate $12.5 million in incremental margin, 1.25 points, with an MDO program that generates a 5% improvement.”

Source: Markdown Optimization: Worth More than Its PriceIDC Retail Insights, 2012

And Retailers are testifying to the value of Markdown Optimization

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Source: RSR Research, 2014

So if there was a way to mark down end-of-season or end-of-life merchandise that would sell through and

make you more profit, wouldn’t you do it?

What if you knew the perfect time to make markdowns and how much discount was needed, so you stoppedgiving money away unnecessarily?

And what if you could make these critical decisions on a more localized basis? Even supporting ship from store based on markdown liability.

Price

Today OutDate

Week4

Week6

Week2

Sell-Thru

20%

40%

60%

80%

-20%

-40%

-60%

Price

Today OutDate

Week4

Week6

Week2

Sell-Thru

-28%

-65%

Adopting a non-analytical approach to markdowns will deliver sub-optimal

benefits

Analytical approach continually reforecasts demand and adjusts

markdowns to meet desired objectives

Continuous monitoring and reoptimization

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Initial markdown plan-Schedule of recommended, optimal markdowns to be taken on a given week -Forecast of expected sales and inventory profile over time

Monitoring and re-optimizing the plan-Re-optimizes plan based on actual sales-Adjusts forecast and proposes new markdown schedule

Optimal markdowns, both depth and timing, will vary by store and product (style/color in apparel)…

…which requires more than spreadsheets to manage and execute

Store 001 Store 002 Store 003 Store n

How IBM Can Help

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IBM’s cloud-based, markdown optimization solution empowers retailers to plan, optimize and execute more localized and profitable markdown decisions for both short and long lifecycle merchandise.

Leverage advanced science and analytics to make better “what, how, when and where” markdown decisions:

WHAT products to markdown (priority)

HOW much to mark down (depth)

WHEN to start markdowns (timing)

WHERE to apply the mark downs (granularity, down to store)

Set Markdown Plans to Meet Objectives While Adhering to Policy

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Set goals to help reduce inventory while dramatically improving profit and revenueMaximize revenue, maximize profit, minimize inventory, or

even a mix of objectives

Ensure markdown recommendations adhere to policySet constraints and exceptions including number of markdown occasions, minimum and maximum markdown percentages and allowable price points

Evaluate Markdown Plans Prior to Execution

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Compare multiple scenarios to identify the optimal approachMeasure the impact of alternative scenarios against a baseline of ‘doing nothing’ and understand the forecasted results prior to implementing.

View Timing & Depth of Planned Markdowns

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Easy and IntuitiveVisualize recommended markdown depth and timing using a graphical, color-coded representation of suggested price reductions by week.

Track Performance Against Plan

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Monitor progress and re-adjust forecasts based on current performanceUse pre-built reports to track current performance by week and automatically reforecast future demand to achieve the desired goals.

CompanyDenmark’s €6 billion, #1 grocery retailerOperates multiple store formats

Business ChallengeDecline in non-food sales & margin since 2008Markdowns applied at national levelChallenged by existing spreadsheet approachUnable to predict optimal duration of markdowns

SolutionImplemented IBM Markdown OptimizationCan now predict impact on sales, profit, stockAbility to execute markdowns to store-level

+10%increase in markdown

gross margins

+76%increase in

demand forecast accuracy

3xincrease in optimisation frequency

“We can now work more strategically with markdowns to drive the profitability of our nonfood business.”

Kent Bredahl,Coop Danmark

CompanyOne of Europe’s leading fashion retailers; 2nd largest in its own countryPart of group that is present in 72 countries, 1,900 stores, €1bn turnover

Business ChallengePrevious markdown process was time consuming and impreciseUnable to respond quickly enough to changes in market trendsLeading to increase in out of season (old) inventoryLosing gross margin and not achieving sell through objectives

SolutionImplemented IBM Markdown OptimizationBetter monitoring and control of markdowns across all countriesFacilitate fresher collections into the stores faster (old inventory was taking up space)

€40mprojected

gross margin improvement over 3 years

+5%estimated

increase in sell through

Reducedweekly markdown approval process

from 3 days to 1 day