Merchandising Minimums: The Bane of the Retail Industry.

Minimums; If you have worked in the retail industry, you know what they are. Minimums are a minimum amount of product you are required to purchase – either in dollar amount or in SKU count – from either the wholesaler or direct distributor.

Wholesalers and distributors have minimums in place for a variety of reasons. Most importantly, it allows them to require the retail buyer to purchase a minimum amount of inventory in order for it to ship. Dollar minimums can run as low as $100.00 per order, but the problem comes in with SKU minimums.

Meeting a dollar amount from the buyer is an easy thing to accomplish when ordering to an open-to-buy, however, when the distributor requires a 24 or 30 count purchase per SKU, it becomes very difficult to expand your selection when you are required to increase your inventory arbitrarily as a result of a minimum.

Testing new products or entering new lines of products may be the biggest problem. Minimums can limit your ability to grow your selection when you are forced to buy a 24 case count of a single SKU. Smaller retailers have said for years that they are more than able to adhere to dollar minimums, but when it comes to SKU minimums, it becomes a common complaint that SKU minimums need to be lowered or eliminated.

SKU minimums can be justified by the distributor because it’s easier to ship a box lot as opposed to breaking the seal on a carton, parsing out individual items, and dealing with the remaining count in a separate warehouse location. Case counts are generally housed in a different section of the warehouse than individual SKUS, so breaking a carton results in additional labor costs.

Another reason distributors use dollar minimums is just plain economics. It doesn’t make sense to ship an order if the shipping costs exceed that of the order. Retailers also need to remember that it takes person hours to collectively pick, pack and ship the order, so labor costs, as-well-as product costs are worked into the minimum order amount.

At the retail level, minimums are used to fill a desired merchandising space, whether that be peg hooks, physical end-cap shelving or in an alternative promotional space. “One to show and one to go” was, and still is, the saying used by some retail outlets. A minimum of two units, although a small number in most cases, allows the retailer to merchandise a unit in its normal location while the additional title is used in a promotional space. If sold, there is still one in stock and this avoids the dreaded “stock out.”

photo-6It’s an old view of retail stocking but most large retailers still practice this inventory model. Ordering product to meet a product display’s capacity is nothing more than using inventory as a fixture. This is most evident at places like Barnes & Noble, where stacks and stacks of new release books are used to fill multiple locations – table, wall, end-cap, shelf location, counter top display, vendor manufactured kiosks and so on.

The women’s fashion industry however, may be the biggest offender of merchandising minimums. In an industry that manufactures in more than five standard generic sizes like XS, S, M, L, XL, and up to 19 individual pant or dress sizes [size 0-18], the retailer is then forced into an overstock situation prior to the new fashion line hitting the racks.

Keeping in mind that the fashion season generally run a season and a half a head of itself, large retailers like Target, Walmart, JC Pennys, Kohls, Macy’s and Forever 21 are in a never ending race to clear the racks in the shortest amount of time to make way for the coming seasons new fashion line. Where does this leave the retailer? It leaves the retailer with never ending racks of clearance merchandise most likely in the XS and Small sizes.

The pant size of an average female is 12, a number smack dab in the middle of large. In most cases, when a new fashion line appears in the stores, it’s the medium, large sizes that are snapped up immediately. Since the buyer is trying to avoid a season end clearance avalanche, they are usually purchasing the same amount of size extra small as they are buying smalls, mediums, larges and extra larges. In most cases, this is a minimum of three of the same SKU per size; now multiply that across up to 18 sizes purchased across 1900 Target stores in North America and you suddenly get an understanding of the shear dollar amount and inventory volume of the potential overstock or clearance.

Near the end of the season, the extra larges have been sold leaving an overstock of extra smalls and smalls filling the clearance racks. Very few buyers, if any, will practice “bell curve buying;” in other words, purchasing a small amount of the smallest sizes, more of the mid-range sizes, and back to a smaller quantity of sizes over large.

Instead, large retailers are forced into a minimum situation by the fashion designer across all sizes thus the buyer ends up spending precious open-to-buy dollars on low turnover sizes while stocking out on the most popular sizes.

clearance racks tipsSo what happens to the unsold clearance merchandise after its life cycle has expired? Some of it is resold to outlet stores like T.J. Maxx or and sadly, very little of it goes to organizations like Goodwill. Since we live in a world of disposable fashion, clearance merchandise in most cases ends up in the landfill or destroyed.

Large retailers like Forever 21, Old Navy, and H&M claim that destroying clothing that has never made it to the cash register protects the market from being flooded with their brand. In summary, it prevents people that are homeless from donning a new H&M outfit.

The billion dollar clearance rack dilemma is a ghost that almost all large retailers are chasing, but with better store allocation techniques, lower unit minimums balanced off with higher dollar minimums and bell curve buying, the ever increasing clearance rack monster can be tamed.