Sensing a Pattern

Gordmans has long been an off-price department store revered for passing along deep discounts to its fashion- and style-conscious Midwestern customers. At one point in its long history, the Omaha, Neb.-based chain operated as 1/2 Price Stores.

So, when it comes to pricing the array of name-brand apparel, accessories, footwear, home decor, designer fragrances and furniture sold at its 65 stores in 16 states, Gordmans leaves little to chance. The mid-market chain employs predictive markdown optimization technology to guide its pricing, stabilize inventory, maximize gross margins and better understand local shopping preferences.

Markdown optimization is a statistical forecasting tool that helps retailers reliably predict how apparel markdowns may affect bottom-line business and operational objectives before they are implemented, allowing them to determine the most advantageous point in the product lifecycle to re-price goods to optimize gross margin dollars and inventory turn.

Jeff Gordman, the technology-focused president and CEO of the company his great-grandfather started in 1915, appreciates the “granular understanding” that markdown optimization affords his team of buyers. The technology is being applied to markdowns at the store and SKU levels, rather than relying on a rigid, one-size-fits-all approach.

“We have the ability to actually take the same SKU and make different markdown decisions across our chain,” he says. “It’s a very different process today.”

Gordman operates a company that offers “everyday savings of up to 60 percent” off department and specialty store prices, and he believes that innovation gives the chain an edge in its competition against larger retailers in the marketplace. Then again, retail innovation is something of a family legacy: Grandfather Dan Gordman is credited with bringing central checkouts, shopping carts and self-service shoe departments to the Omaha shopping experience.

Gordman, who holds degrees in economics and management from the Wharton School at the University of Pennsylvania and the Sloan School at MIT, respectively, became CEO of the company in 1996. In September, he engineered a deal for the company to be acquired by an affiliate of private investment firm Sun Capital Partners, whose portfolio of retail and restaurant companies include The Limited, Shopko, Pamida, Boston Market, Friendly Ice Cream and Hickory Farms.

“Gut” supported by data
Gordman, who continues to lead the company and its more than 4,000 employees under Sun Capital Partners, moved the chain into the future with an easy-to-shop store layout buttressed by riveting signage and graphics, a “children’s theater” and sports-themed seating areas in stores.

In the past, Gordmans’ buyers made markdown decisions as much on merchandising gut feel as anything else. Gut feel now is supported by scientific data that the buyer can accept or adjust as needed.

“What we did in the past was to take a look at it more from a retrospective standpoint versus a prospective standpoint – looking in the rearview mirror rather than looking forward based on empirical data of sell-throughs by SKUs,” Gordman says.

Applied Intelligence Solutions, a Westminster, Colo.-based provider of intelligent software platforms for retail enterprises, led Gordmans through the launch of its MarkdownXpert software package. One of the solution’s highlights is the use of pattern recognition in statistical forecasting. Pattern recognition allows the retailer to focus on the attributes of a particular product, such as fabric, cut, color and style, rather than selling it like all other new blouses in the category and treating it with one forecasting model.

“What it lets you do is zero in very quickly on fast-moving product and gives you a better forecast because it really is a model built on that item, rather than [on] a collection of items averaged out,” says AIS CEO Jim Dixon.

Gordmans uses pattern recognition “to predict the selling lifecycle of a specific SKU over time based on experiences with similar SKUs or groups of SKUs,” Gordman says. “We then have much better insight as to where and when and to what extent to re-price every SKU to optimize gross margin and turn.”

Gordmans’ implementation of markdown optimization occurred in two stages. In the first phase of the rollout, the methodology focused specifically on maximizing margin on sales and expected margin on residual inventory. As the three-month testing period concluded, the Gordmans and AIS teams fine-tuned the solution to calculate multiple markdown targets, including turnover goals for disparate merchandise, opportunity cost and inventory turnover, achieving a 9.6 percent improvement in margin.

Item, store-level forecasts
In June 2007, Gordmans moved to a second, more demanding phase of implementation — forecasting the chain’s broad assortment of apparel and home decor at the item and store levels. This represented the fundamental value proposition of the solution.

“It allows us to optimize our profit even more,” Gordman says. “It may be that at some stores [an item] is selling really well and it doesn’t need to be marked down at all,” while at other stores “it needs to be marked down by 15 percent.” MarkdownXpert “allows you to differentiate the re-pricing by store or store group,” he says.

Margin improvements of nearly 10 percent aren’t likely to be achieved with a chain-wide markdown approach, Gordman says. In that scenario, markdowns typically are taken on imprecise timelines and may be too conservative or too aggressive.

“What this helps us do is turn inventory faster,” Gordman says, “so it opens up receipt dollars more quickly that we can then reinvest and have more productive inventory. It can also help give us better visibility to determine what’s actually driving the business on a store-by-store basis.”

MarkdownXpert also presents scenarios for cross-divisional budget balancing, whereby retailers can optimize markdowns against budget to maximize revenue dollars and margins across the business.

“We can make sure optimization targets keep track of what their current business objectives are,” Dixon says.