Retailers turning to localized discounts

MarketWatch

NEW YORK — At the Banana Republic store in New York’s World Financial Center, a white pleated skirt was on sale for $39.99, marked down from $69. The same skirt was discounted to $33.99 at Banana Republic’s SoHo store, just two miles away.

The difference wasn’t a mistake. It’s part of Banana Republic’s parent Gap Inc.’s very deliberate move to tailor prices to fit local demand and inventory — right down to the individual store level.

The payoff: Gap’s merchandise margins have either matched or topped year-ago levels in each of the past five months through May, despite declining same-store sales overall.

Gap isn’t alone. Other retailers, including Wal-Mart Stores Inc. and Home Depot Inc., have taken on or expanded some form of “localized markdowns,” rather than slash prices the same amount at the same time across all markets. This helps boost profits whenever items selling well in one region offset the need for deeper discounts somewhere else.

“It allows you to be more surgical and dynamic,” said No. 1 home-improvement retailer Home Depot Chief Financial Officer Carol Tome in an interview. “Rather than marking down by entire market, you can use your markdown strategy depending on the sell-through in each store.”

As the weak economy forces retailers to close stores or trim expansion plans, they’ve scrambled for ways to maximize returns from each existing store, analysts said.

How much, when and where to slash prices can make a big difference to the bottom line, especially so soon after having to discount merchandise at least 70 percent off over the holidays to clear excess stock, analysts said.

While more retailers said they plan to control costs by spending less on information technology, 33 percent said they plan to install what the industry calls “markdown optimization” software systems over the next 18 months to help them calculate discounts according to local demand. Fully 21 percent of retailers are already doing it, according to a survey from trade group National Retail Federation earlier this year.

The survey also showed pricing strategies retailers favored the most for the next 18 months were those that took regional and local market differences into account.

“What works in Topeka, Kan., doesn’t work in San Francisco,” said John Long of consultancy Kurt Salmon Associates. “You can’t take the peanut butter approach that every store has the same customers and the same competitive issues. Things like pricing become a lever that retailers absolutely have to use.”

At the world’s largest retailer, Wal-Mart, prices can vary by market on some products with its stores also having the ability to change price of a product “to be competitive with other surrounding stores,” spokeswoman Tara Raddohl said.

Wal-Mart also matches the price of any local competitor’s printed ad for an identical product, she said.

Sears Holdings Corp., owner of Kmart and its namesake department stores, discounts clearance items based on individual market demand, spokeswoman Kim Freely said, declining to specify whether Sears plans to expand that strategy to regularly planned promotions as well.

On top of localized markdowns, No. 1 U.S. clothing chain Gap also is testing localized promotions, such as offering 10 percent discounts over three days to military families in Southern California at its Old Navy chain. It worked so well that the company has set up a military discount day on the first day of each month throughout the discount chain, Gap’s largest sales unit, spokeswoman Melissa Swanson said.

The right use of localized markdowns could pay handsome dividends, especially given the economic challenges facing retailers that led to the collapse of such retailers as Mervyn’s and Circuit City Stores Inc.