I read this report by Phil Wahba on Gap Inc. today. Two things struck me that I think make it clear why it is so hard to run a fashion retailer well:

1. Wahba reports in the article that Gap is betting on the success of their new “black pants” line. They are preparing an entire ad campaign around it.

2. Ultimately, a retailer’s performance is driven in large part on the depth of the markdowns they ultimately have to take to clear out the inventory they stocked up on while making bets like this one on black pants.

So they are betting their company’s financial performance on fickle consumers deciding they want black pants. How do you do that? While I’m pretty confident people will want pants, what if they want gray? I don’t think ‘almost’ counts for much in fashion.

The report goes on to cite Needham & Co retail analyst Christine Chen who warned that Gap could be setting itself up for another round of price slashing if it finds itself saddled with merchandise it has trouble selling, but said some of the inventory increase was likely to make sure Gap did not run out of the black pants.

Given this, I can only imagine the army of analysts they have in planning looking at sales velocity and margins and planning markdowns throughout each season. The amount of effort that goes into making sure they squeeze the absolute maximum revenue out of the inventory in the stores is immense.

What is really interesting, then, is how little attention is paid to squeezing the last dollar out of whatever is left after the markdowns are over and there is still inventory left over. That is what gets liquidated as excess inventory, and typically, that just goes to one of a handful of liquidation companies with whom the retailer has done business for 20 years. Little to no negotiation happens, virtually no analysis is performed, and little attention is paid to it.

In fact, what you can recover in bulk liquidation actually creates an anchor that informs the decision of when to pull the product off the expensive retail floor and stop marking it down any further. The sooner you do this, the sooner you can get new product out there at full retail price to start the cycle again. So, if you can raise the prices in liquidation you raise that threshold, you get the old merchandise cleared out sooner and you get the new merchandise on the floor sooner and you end up with fewer markdowns and a higher blended gross margin.

The team at B-Stock Solutions has helped companies liquidate apparel, electronics, airplanes, buildings, land, scrap metal, tickets, Christmas lights, and many, many other things using our private marketplace technology and online auction expertise. While each of these commodities has its own profile in terms of the percent of original retail that can be recovered, what has been consistent across all of it is that we have been able to generate 20% – 50% more for the items than the sellers did using legacy liquidation methods.

Think about that! If someone went into the corporate office at Gap, Nordstrom or Sears and demonstrated a new planning tool for markdown management that resulted in a 20-50% improvement in sale prices by better timing markdowns while still meeting sales velocity targets it would be revolutionary. The next billion dollar idea! Of course, that is unlikely to ever happen because so much time, effort and money is spent optimizing that part of the business. It is already pretty efficient.

But liquidation is not. Just this week I spoke to another billion dollar retailer about their inventory liquidation process. Like most others, they use a manual process of emailing out manifests and taking offers by phone, email and fax. Best offer by Friday gets it. I explained, as I always do, that we have replaced that same process dozens of times and *always* generate 20%-50% improvements AND it will take less effort AND we’ve done this with nearly $1 billion of sales AND we can run a risk-free pilot to prove it will work for them.

The response: “we’re pretty happy with our current system”.

I’m open to suggestions on how I shine a big, bright light on this remaining inefficiency in retail from anyone who has actually read this post all the way to this point.

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