Related to my post yesterday, the NY Times today has an article on retailers intentionally keeping stocking quantities low (NY Times, 11/19/09, Luxury Stores Trim Inventory and Discounts). If the Brioni leather bomber jacket is what you need for that special someone this season, you better get to Saks fast because they have only 1 left – at a mere $5295! (And then you need to see a therapist to explore why you feel compelled to spend $5295 + taxes on an article of clothing which is not suitable for climbing Mt Everest or walking on the moon.)
The idea is simple – intentionally stock less than a “normal” amount so that you will not have too much inventory left over which needs to be discounted. Because if you have too much inventory left over, then customers may anticipate this and not plop down $5K to buy at the regular price, thereby certainly ensuring that you will have to discount. Or, you are doing this to generate a sense of scarcity, and therefore desirability:
“What’s luxury retailing all about?” Mr Sadove said. “It’s about a scarcity of supply.”
Given that we are talking about ultra luxury products, I wonder if the scarcity argument holds water. If you are spending $5K on a jacket, then you better be sure that you will never see another person walking down 5th Avenue with that jacket on. But only people walking down 5th Avenue would be willing to spend that kind of money on a jacket (i.e., not everyone has the same probability of encountering another person with this jacket on). So unless that jacket is *unique*, it is not scarce enough.
Next, the standard approach to avoid markdowns with luxury goods is to not markdown! A $5K jacket probably has a very healthy margin (say $4,750), so if you have a few left over, then ship them back to the producer, take more time to sell them, or burn them. But whatever you do, don’t markdown the price! Having a few left over jackets that need to be sold in some other country with the label ripped out may be cheaper than stocking out when somebody wants to pay you an obscene amount (ok, I’ll stop harping about the ridiculousness of the price).
The article recognizes that the best approach is to start with a limited supply and then replenish only if necessary. This is feasible in some categories (contemporary apparel and women’s shoes) but not in others (European designers). Of course, this reminds us of Zara:
The graph above nicely illustrates the Zara strategy – start with a more reasonable price and a limited quantity, replenish if necessary, and don’t mark down all that much. The net effect is that your total profit (light blue) can be higher.
And there is one key lesson from Zara that is missing in the discussion of Saks. If Zara runs out of one item, they generally have another item available that is a close substitute. If you like a particular black bomber jacket at Zara, then you should buy it because (a) it will not be marked down and (b) if you wait then you will have to buy a different black jacket. Either way, Zara gets the sale. In the NY Times article, they are suggesting that it can be better to simply stock out. If you don’t have an adequate substitute, then that is really a costly strategy. Being smart doesn’t mean you are willing to incur costs. Being smart is avoiding costs while maximizing revenue.