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Why Sweaters Sell for Less Than $2 Apiece

Retailers want to boost their margins, but they can't do so until they improve their inventory accuracy.
Posted By Mark Roberti, 02.04.2010
My wife recently visited Kohl's, a U.S. department store, because it was having a big sale. She picked up a sweater originally priced at $36, that was marked down 90 percent to $3.60. But some items, including the sweater, were also marked down another 25 percent, so the price was $2.70. And my wife had a coupon for 30 percent off, so she paid a grand total of $1.89 for a $36 sweater.

That is not a typo.

I've read a number of stories recently about how retailers are focused on getting their margins up because sales are flat. They need to make more on each item, in order to increase profits or reduce losses. Based on my wife's shopping experience, it doesn't seem they are doing a great job.

Attention all retailers: RFID can help—big time. The way to get margins up is to sell a higher number of items at full price, or close to it. One of the biggest factors leading to markdowns is poor inventory accuracy and ineffective replenishment.

Think about it: There's a hot new item in stores for the holiday or back-to-school season. Retailer X advertises it, attracting a lot of people to the store. The product is purchased, but is not quickly replenished, even though plenty remain in the store's back room. As such, some shoppers leave without buying the item. And while the initial rush led to replenishments being ordered, by the time they arrive, demand has fallen (the shoppers stocked up on the product elsewhere). Therefore, the goods need to be marked down.

Bill Hardgrave, executive director of the University of Arkansas' RFID Research Center, has studied radio frequency identification in apparel retail, and found that the technology improves inventory accuracy from an industry average of around 65 percent to 95 percent or better. RFID provides retailers with the visibility to know where items are located within a store, and helps them to improve replenishment—and sell more products at (or closer to) full price.

RFID Journal developed an ROI calculator that shows how increasing the sales of just a few items at a higher price can have a dramatic impact on margins and, thus, the bottom line (see RFID Journal Fashion Retail ROI Calculator). We created two scenarios to illustrate this point, outlined below.

Scenario 1: Sales of a Sweater With a List Price of $100, Without RFID
In this scenario, a retailer has 100 sweaters that cost the business $40 apiece. It plans to sell each sweater for $100, but only sells 40 at that level. It sells another 20 at $70 and $60 each, then 10 at $50 and 10 at $40. The total revenue is $7,500, for a $3,500 profit.



Scenario 2: Sales of a Sweater With a List Price of $100, With Improved Execution Through RFID
In this scenario, the retailer is able to sell 43 units at the full price, 24 at $70, 22 at $60, six at $50 and only four at the breakeven price of $40. Selling just nine of the original 100 items at a higher price leads to an additional $300 in revenue (4 percent), all of which is reflected in the profits, because the items were already purchased and shipped to the stores.



A 4 percent improvement in profit margin for a retailer with $100 million in revenue is an additional $4 million in profit. The calculator enables you to figure out the cost of deploying RFID, but it's likely you will achieve an ROI within six or seven months under the scenario we described—and these numbers are actually conservative. Most pilots and deployments have showed an increase in sales of 5 percent to 15 percent, as a result of selling more units at or near full price.

Of course, my wife is not so eager to see retailers deploy this technology. She likes paying less than $2 apiece for her sweaters.

Mark Roberti is the founder and editor of RFID Journal. If you would like to comment on this article, click on the link below. To read more of Mark's opinions, visit the RFID Journal Blog or click here.

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