With brick-and-mortar stores closed and softened consumer demand, retailers are sitting on mountains of inventory. As the spring merchandise gets stale sitting on sales floors and in warehouses, what can companies do to turn this physical capital into cash?
The secondary market has seen continuous growth over the past decade, but this year it is expected to see an unprecedented flood of merchandise. According to numbers from Dale Rogers, professor of logistics and supply chain management at Arizona State University’s W. P. Carey School of Business, and Zachary Rogers, assistant professor of supply chain management at Colorado State University, the secondary market across categories has more than doubled in size since 2008, totaling $633 billion in 2019. Curtis Greve, vice president of liquidation at Inmar Intelligence, foresees a 25 percent to 30 percent increase in fashion overstocks this year, driven in part by expected bankruptcies that will leave retailers needing to liquidate assets.
But with this glut of merchandise expected to hit the secondary market, retailers have fewer channels than usual available to clear out inventory. “Particularly this year, at a certain level we’re all drinking out of a firehose, so you’ve got to have something that can handle it, and there’s not too many options,” said Greve.
Off-price retailers would typically be one of the main candidates for offloading unsellable inventory. However, these merchants are facing their own problems, including reduced cashflow and finite warehouse space. Most have limited e-commerce presences, and some that do sell online, such as TJ Maxx and Marshalls, have temporarily closed their virtual stores during the pandemic. Additionally, these retailers have business models that are centered on quickly turning merchandise, further making stocking up unappealing until they reopen. “You think of the secondary market as like a drain,” said Zachary Rogers. “And so the drain helps to get rid of all the excess built up inventory. The issue now is that those drains are cut off.”
One response from retailers has been to run drastic markdowns on merchandise, essentially turning their full-line stores into off-price channels. Companies that have their own direct-operated discount chains could pump the products into these stores, but according to Dale Rogers it might be better to sell them to another party to get inventory off a company’s books.
While some typical targets for the secondary market are not equipped to handle the glut of inventory coming from tier-one retail, one of the bright spots is salvage dealers. Liquidation sales offer companies access to a wider range of buyers than a traditional one-to-one purchasing agreement would, raising the likelihood of finding the right customer.
“I always firmly believe that any excess inventory, any liquidated anything should end up in the hands of whoever can extract the most value from it,” said Howard Rosenberg, CEO of liquidation auction firm B-Stock Solutions. “Because the person who will extract the most value from it will also be willing to pay the most for it.”
Rosenberg says the volume of merchandise he is receiving from some of his apparel clients has “skyrocketed.” This is in part because merchandise from returns that would typically be refurbished or processed another way is now being sent to liquidation.
All that is needed from the brand side to liquidate is the ability to physically remove merchandise from a warehouse. “If they can just get it out the door, we can most likely put together the rest of the solution from there that would result in being able to liquidate that inventory and turn it into cash relatively quickly,” Rosenberg said. This could mean just a matter of days. Typically, companies send manifests to B-Stock and then the goods are shipped directly from the client to the buyer once they sell, and the buyer will usually pay for transportation. However, if companies need to offload inventory immediately, B-Stock has logistics partnerships that enable it to help with aspects such as cross-docking and manifesting.
Liquidation has its own tiers of operations. A firm might buy truckloads of goods from a major retailer and then turn around and sell individual pallets or lots to other sellers, such as merchants that sell on eBay, at flea markets or in thrift stores.
Apparel liquidator B&G Trading caters specifically to resellers that are looking for smaller lots. Jorge Banda, president of B&G Trading, has seen some individuals take up selling on Poshmark, Mercari or another marketplace as a new side hustle or main source of income to deal with pandemic-related job losses.
“People…need to make a living, whether that be at their traditional job, or with a newly pursued endeavor such as reselling,” said Banda. “And obviously people will still need clothing, people still need certain textiles to go on with their lives. So I don’t really see a limit [to what can sell on secondhand marketplaces]. Because now if you were a more traditional buyer that liked to do purchases in person, you’re having to go online now, so the additional merchandise out there, additional assets, the additional sellers are being met by the additional buyers that are being forced to buy online.”
Once the off-price retailers reopen, Dale Rogers noted that they may also turn to the salvage market for deals on overstocks, adding to the demand in the market. Consumers who were laid off or who took a hit financially during the pandemic will also be looking for a good deal, providing ample customers for off-price and discount channels. This segment of retail is expected to pick up and recover faster than full-price channels.
While there is a virtually unlimited buyer base for liquidated merchandise, items may be priced lower than normal as demand for apparel slows. Reflecting consumer interest in tier-one retail, items such as home goods, exercise equipment, beauty and essentials are moving faster than apparel in the liquidation market. Raising the likelihood that items will move comes down to brands offering flexible timeframes and realistic pricing expectations.
“We do a mix where we’re moving all the cherries and the pits,” Greve said. “It’s easy to sell the high valued stuff really quick, but we get paid to sell it all. It’s the rising tide raises all boats. So you may not maximize your recovery on a given item or given category, but hopefully you’ve got enough buyers and enough marketing out there where you can achieve a relatively good recovery value on everything.”
Banda sees potential during the pandemic for companies to loosen their terms as they sell to liquidators, potentially opting for payment methods such as consignment-style asset allocation.
As an alternative to liquidation, some retailers may choose to store their unsold stock until next spring, betting on the fact that styles will remain relevant and in demand for a year. However, using this method of hoteling comes with the challenges of trying to source and pay for storage capacity.
Experts agree that it is better to move merchandise when it is still fresh, as its value decreases as it gets stale. “One thing about overstocks, particularly with these categories, they don’t get better with age,” Greve said. “The value drops as it gets older, and everybody’s going to want newer, nicer stuff next year.” Clearing out goods can also make room for new merchandise that will offer better margins.
While this period is anticipated to be worse than the recession of 2008, there is a silver lining that could help companies mitigate the issue of overstocks in the coming months. “Supply chains have really been good at dropping supply to match lower demand,” Dale Rogers said. “We’re good at turning the spigots off much better than we were a few years ago. So the problem of excess inventory is gigantic, but I think that the folks that are running the supply chains are pretty smart, and have been really aggressive at trying to drop that down and in managing risk as well as they can.”