VF Corp. wasn’t looking to change its markdown process when new services company Apex Decisions Inc. approached the $6.5 billion maker of Wrangler, Nautica and The North Face.
But VF Corp. chief financial officer Roger Spatz suspected the company’s 78 outlet stores could benefit from an approach that took local tastes and trends into consideration.
The Greensboro, N.C.-based giant had been using Excel to set prices and markdowns for all of its VF Outlet stores nationwide. Apex, of Minneapolis, which was founded in 2001 by a physicist and an engineer, proposed using price elasticity modeling to determine optimum markdowns for whatever clusters of stores, styles and colors VF desired.
“We felt we were leaving money on the table,” Spatz said. “Either we were taking markdowns too quickly or we weren’t taking them fast enough, which negatively impacts stores toward the end of the season.”
Two pilot tests last year convinced VF to implement the service. “The results were very dramatic,” Spatz said.
From August through October 2005, VF tested the service in playwear and also in two jeans categories. The test was conducted in 15 stores, which were compared with 15 similar stores that still used VF’s existing process.
Adjusting for some changes in the business and leaving out playwear, a business the company has since exited, revenues increased about 5 percent, Spatz said. The gross margin percentage increased 3 percent, and gross margin dollars increased 18 percent.
Remarkably, this was during a period when traffic to the stores decreased.
Another result was that the outlet staff had less work to do as far as actually marking down the products. One of VF’s concerns was that the new service would increase the number of markdowns and “touches” of the merchandise. In fact, by using Apex, the company was able to decrease its touches about 10 percent.
“When we dug into the data, it was because we were selling more product in test stores at the price they had been marked,” Spatz said.
A second pilot expanded on another product group and ran through February of this year. It produced similar results. So the company went ahead with an implementation across all of its outlet stores, which was completed in August in time for the back-to-school season.
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VF appreciates the service’s ability to focus on increasing sales as well as gross margin dollars.
“We thought gross margin dollars are most important for the majority of our business,” Spatz said. “But since we’re an outlet, we also have the dynamic to take products and liquidate them, so if we want to maximize sale on distressed products, we can do that.”
Now VF electronically feeds Apex the prior week’s sales results and inventory levels. Then every Monday at 2 a.m., VF receives Apex’s recommendations. VF’s analysts look through the changes and make any necessary adjustments, such as meeting competitor’s local discounts. By Tuesday, the changes are applied to VF’s system and passed out to the local stores, which take the markdowns on Wednesday.
Spatz said the company opted to keep prices fairly consistent between stores in the same geographical area and across colors in the same style, so as not to confuse the customer.
Apex Decisions bases its pricing on a percentage of the revenue it generates for its customers. It is not the first price optimization company. ProfitLogic, which was acquired by Oracle, has a large market share among apparel retailers.
In the future, VF hopes to leverage the Apex service and improve its performance further by implementing a strong allocation tool such as Arthur, Spatz said.