May 10, 2005
Saks Fires Executives Over Improper Collections
By George Anderson
The issue of “markdown money” has been getting increased attention in retailing circles and the business press lately as vendors and regulators begin to more openly question the practice. Is it the legitimate attempt to move more merchandise or is simply a move to hide a retailer’s mistakes and prop up reporting results so that executives can continue earning their large salaries and bonuses?
An investigation by an internal audit committee at Saks Inc. found that there were abuses of the practice by senior executives within the company, with more than $20 million improperly collected between 1999 and 2003.
Yesterday, the retailer announced it had fired three individuals connected to the “overcollection” and planned to reduce or eliminate the bonuses paid to others, including R. Brad Martin, Saks Inc.’s CEO and Douglas Coltharp, Sak’s CFO.
According to a company press release, “Management has been asked to develop an action plan for enhanced ethics training, improved awareness of the company’s compliance and ethics ‘hotline,’ and similar matters.”
Moderator’s Comment: What are your thoughts on markdown money deals? Have ethics at Saks and elsewhere within the retailing business left the building
along with Elvis? –
George Anderson – Moderator
BrainTrust
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So it took $20 million to determine that something was awry? And now the same ones who collected bonuses by unethical practices are to change the policy regarding the practice?
How about removing them all and starting over?
Markdown money deals are a lot like sports “heroes” taking steroids to gain an advantage. Everyone appreciates the “home run hitter” and the mighty retail producers but few want to check out the medicine cabinet. Now that Saks has done that, resulting in several of their key priests being defrocked, one is inclined to believe that all business ethics have “left the building with Elvis.”
Here’s is a paraphrased thought that’s possibly apropos by the late humorist, Josh Billings, “To enjoy a good reputation, operate honestly in public, and steal privately.” But is this criteria to be applied only to the world of retailing today?
Unless there is a very unusual event, e.g.: ingredient/material found dangerous, or wrong ingredient/material used, the retailer has movement numbers and research tools to support order level. Hmmmmmmmmmmmm
Is there enough space in this column for this topic?
The practice of collecting markdown money from vendors is strategically and operationally incompatible with running a truly effective merchandising organization. The ethical basis of this is a different question. Markdown collection can be ethical, if it is clearly understood prior to the sale, the terms negotiated and agreed upon, and then implemented according to those terms.
Gross margin guarantees, markdown allowances, sell through minimums…..what IS the underlying ethical justification for this practice? Brace yourself: the only justification is that the retailer has surrendered the power of choice over merchandise assortments to the vendor community. The “price” of this surrender is that the vendor community is responsible for meeting the performance targets established for the assortment. In effect, the buyer selects vendors, not merchandise. Why? Because all too often the buyer is less capable than the vendor in selecting merchandise which will perform appropriately.
Well run retailers do not engage in this practice. There, I’ve said it. It’s a crutch, a safety net, and completely erodes accountability. Creating an effective and appropriate merchandise assortment is one of the single most important skills a merchant can have. Institutionalizing markdown allowances communicates to the merchant “do the best you can, but make sure that someone else pays for your mistakes.” Building an effective and appropriate merchandise assortment is extremely difficult, and very few buyers do it well. Markdown allowances and gross margin guarantees have been institutionalized because of this fact.
Wal-Mart and Target do not (as a general rule) ask for or obtain markdown dollars from the vendor community. They also happen to be the most effective retailers in the country. At one point in its existence, Toys R Us set markdown dollar budgets. Another national retailer was still doing this within the last 4 years. Making markdown dollars a line item in the official budget and financial planning. Wow.
Here’s a thought. Train your merchants! Build assortments that work for your customer, your strategy, and your physical limitations. Negotiate the best price you can get, buy the quantity which makes the most sense for your plan, and then manage it in-season. If the merchandise from one vendor regularly fails to attract your customer, then stop buying from that vendor.
Markdown allowances. Ugh.
The use of markdown money is widely practiced in traditional department stores. In theory, it fosters cooperation and sharing of risk between the store and a manufacturer. Given the guarantee of help re-pricing slow moving merchandise, the store’s buyer can choose a wider assortment from a vendor. A bigger assortment allows for more compelling merchandising on the floor and a stronger potential upside for sales.
The reality of markdown money isn’t so pretty. When a merchant organization’s buyers are pressured to collect markdown money, the incentive to seek the best possible invoice price is reduced. The negotiation between the vendor’s representative and the buyer often includes an understanding that collecting markdown dollars later necessitates a higher initial invoice price for the merchandise.
It’s easy for this arrangement to spin out of control. It is, in effect, an unauthorized “loan” made by the buyer to the vendor. The buyer pays a higher invoice price to collect a markdown allowance, but at a much later date.
The worst part of all this is the real culprits rarely shoulder the blame. Top merchandise managers pressure buyers to collect markdown dollars to shore up the gross margin line. Under threat of her job, the buyer will often resort to unauthorized, under-the-table deals. When the scheme blows up — as it did at Saks — it’s the buyer who will usually be the first blamed.
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So it took $20 million to determine that something was awry? And now the same ones who collected bonuses by unethical practices are to change the policy regarding the practice?
How about removing them all and starting over?
Markdown money deals are a lot like sports “heroes” taking steroids to gain an advantage. Everyone appreciates the “home run hitter” and the mighty retail producers but few want to check out the medicine cabinet. Now that Saks has done that, resulting in several of their key priests being defrocked, one is inclined to believe that all business ethics have “left the building with Elvis.”
Here’s is a paraphrased thought that’s possibly apropos by the late humorist, Josh Billings, “To enjoy a good reputation, operate honestly in public, and steal privately.” But is this criteria to be applied only to the world of retailing today?
Unless there is a very unusual event, e.g.: ingredient/material found dangerous, or wrong ingredient/material used, the retailer has movement numbers and research tools to support order level. Hmmmmmmmmmmmm
Is there enough space in this column for this topic?
The practice of collecting markdown money from vendors is strategically and operationally incompatible with running a truly effective merchandising organization. The ethical basis of this is a different question. Markdown collection can be ethical, if it is clearly understood prior to the sale, the terms negotiated and agreed upon, and then implemented according to those terms.
Gross margin guarantees, markdown allowances, sell through minimums…..what IS the underlying ethical justification for this practice? Brace yourself: the only justification is that the retailer has surrendered the power of choice over merchandise assortments to the vendor community. The “price” of this surrender is that the vendor community is responsible for meeting the performance targets established for the assortment. In effect, the buyer selects vendors, not merchandise. Why? Because all too often the buyer is less capable than the vendor in selecting merchandise which will perform appropriately.
Well run retailers do not engage in this practice. There, I’ve said it. It’s a crutch, a safety net, and completely erodes accountability. Creating an effective and appropriate merchandise assortment is one of the single most important skills a merchant can have. Institutionalizing markdown allowances communicates to the merchant “do the best you can, but make sure that someone else pays for your mistakes.” Building an effective and appropriate merchandise assortment is extremely difficult, and very few buyers do it well. Markdown allowances and gross margin guarantees have been institutionalized because of this fact.
Wal-Mart and Target do not (as a general rule) ask for or obtain markdown dollars from the vendor community. They also happen to be the most effective retailers in the country. At one point in its existence, Toys R Us set markdown dollar budgets. Another national retailer was still doing this within the last 4 years. Making markdown dollars a line item in the official budget and financial planning. Wow.
Here’s a thought. Train your merchants! Build assortments that work for your customer, your strategy, and your physical limitations. Negotiate the best price you can get, buy the quantity which makes the most sense for your plan, and then manage it in-season. If the merchandise from one vendor regularly fails to attract your customer, then stop buying from that vendor.
Markdown allowances. Ugh.
The use of markdown money is widely practiced in traditional department stores. In theory, it fosters cooperation and sharing of risk between the store and a manufacturer. Given the guarantee of help re-pricing slow moving merchandise, the store’s buyer can choose a wider assortment from a vendor. A bigger assortment allows for more compelling merchandising on the floor and a stronger potential upside for sales.
The reality of markdown money isn’t so pretty. When a merchant organization’s buyers are pressured to collect markdown money, the incentive to seek the best possible invoice price is reduced. The negotiation between the vendor’s representative and the buyer often includes an understanding that collecting markdown dollars later necessitates a higher initial invoice price for the merchandise.
It’s easy for this arrangement to spin out of control. It is, in effect, an unauthorized “loan” made by the buyer to the vendor. The buyer pays a higher invoice price to collect a markdown allowance, but at a much later date.
The worst part of all this is the real culprits rarely shoulder the blame. Top merchandise managers pressure buyers to collect markdown dollars to shore up the gross margin line. Under threat of her job, the buyer will often resort to unauthorized, under-the-table deals. When the scheme blows up — as it did at Saks — it’s the buyer who will usually be the first blamed.