For retailers, liquidating customer returns or surplus inventory is a costly affair that they simply cannot afford to ignore if their business is to run smoothly. Companies rightly focus on optimizing recovery prices to reduce losses to a minimum. But what is the best way to optimize recovery?
A popular solution is to go through auctions to get the market price, where the highest bidder wins and buys the merchandise at its last bid price. This method has several advantages: it is simple, transparent, and familiar to most buyers. There are many flaws with this system, however. The biggest ones are the difficulty to manage seasonality, the lack of appeal to larger buyers and the lower recovery rate related to an urgency to sell. In this article, we will go into detail into each and everyone of these downsides and see how it impacts the liquidator’s business.
Let’s start with the issue of seasonality by looking at the two mains periods that occur every year in the liquidation industry.
August to December – The Seller’s Market
Retailers begin their high season in August and gradually increase their sales until they peak in December. The supply of liquidation stock increases gradually, but the appetite from liquidation buyers increases at an even greater pace as they prepare for their high season and need more stock than usual. The demand from liquidation buyers is therefore higher than what is offered by retailers and the impact is predictable: a general rise in prices for surplus inventory and customer return items.
While this rise in price is welcomed by retailers, it causes a great deal of headaches for buyers of liquidation products. They have a hard time getting their hands on the precious merchandise they need to keep their store stocked for their busiest period of the year. In desperation, some buyers end up paying more than they would want just to secure enough merchandise to keep their business running, while others decide to find other suppliers. They end up having to accept thinner profit margins on a higher volume of sales.
Then, with the end of the high season in sight, buyers start cutting down on their purchases while retailers are stuck having to manage an increasing volume of items to process. Prices stop increasing and a new equilibrium is reached at the season’s peak as both sides enter the next market cycle.
January to July – The Buyer’s Market
After the market exuberance ends in December comes the sharp drop in interest from buyers, as they scramble to sell everything they purchased and reduce their own inventories. This period is usually slow for retail businesses, with low sales volumes and drops in selling price. Since the buyers need to generate cash flow from their previous purchases before they can purchase new inventory from the liquidators, they tend to spend much less money at a time when the retail industry is overflowing with unsold goods.
This drastic reduction in demand combined with large return volumes creates a downward pressure on liquidation prices. As we can expect, buyers will only accept deep discount deals with the expectation of turning in a much greater profit which will help them cover their own warehousing costs and justify the long-term investment and risk.
This situation, which isn’t very pleasant for retailers, will last until summer, when buyers start planning for the next high season. This will steadily increase demand while the supply from sellers stay stable. Prices stop decreasing and a new equilibrium is reached at their low point, ready for the next market cycle to begin anew.
Some may argue that auctioning gives the best price that the market can offer at any time. However, as counter intuitive as it may seam, auctions do not allow anyone to obtain the best price throughout the year. This is because, when there is a large supply, a larger fraction of the inventory is sold at a lower price, while a small volume of inventory is sold at higher prices when supply is low. This means that, overall, most of the inventory is sold at the lower end of the price bracket and therefore, on average, sales are concluded at a sub-optimal price, even if individually, every transaction seemed optimal.
The seasonal trend in the liquidation industry is challenging for both sides, since just going with it means the negotiating power shifts twice a year, with each side trying to make the best it of when they have the advantage. The problem is that, in the end, it may make everyone lose more money than they ought to.
Auctions create a very dynamic environment for transactions, as there are multiple bidders looking to get their hand on a limited supply of good products with almost no notice of when they will be available. Many buyers enjoy that format, as it offers a buying experience that is way more “fun” than choosing products on a list. It’s halfway between business and gaming and there are a lot of new buyers that begin in our industry this way. Such a trend is highly visible on websites like Youtube and Instagram, where those buyers record and photograph their unboxings with the delightful glee of a child opening his Christmas present. Many of these videos get millions of views, which serves to further reinforce the high popularity of the auctioning format.
The main issue is that most professional buyers can’t invest the necessary time to monitor all auctions on all websites and review each of their bids as soon as someone else outbids them. Auctions make it harder to plan your need in inventory and allocate proper financial resources to purchasing, as buyers must commit to more deals that they really want to in order to ensure some wins. Even then, excessive bidding may cause a large portion of those deals to be closed at an unsatisfactory price, or be lost to last minute bids that couldn’t be countered in time.
Bigger and more experienced buyers prefer a fixed-price format because it facilitates logistical planning, financial resource allocation, and removes all uncertainty on supply availability. They can get away from all the noise of auction deals and focus on their business without risking being caught off-guard when it comes to their inventory. They can take a day or even a week off without the risk of missing out on all the potential opportunities that may happen during this time, and it’s easier to move faster on a purchase when there is no need to wait days for the auction to end. The fact that these larger players may focus their energy on developing their business means they become more successful, which means… they can help retailers create a steady conduit for getting rid of their overstock.
Another argument of the auction format’s defenders is that it creates an urgency to sell and infuses a dynamic transaction process that would otherwise be much slower. The flaw with this logic is that it creates urgency on both sides of the deal. At any time, many factors can come into play to kill that dynamism and create issues for the market:
When such situations occur, the energy boost that auctioning should generate simply evaporates, as potential buyers shift their focus away from what they consider unattractive deals. The direct consequence of this is that retailers who try to build a sense of urgency may end up with the exact opposite effect: a fire sale that ends at a price far below expectations. In this case, we can say that the market found the real value of the merchandise put on sale within the time constraint that was put on it. However, we can wonder if the sale price could have been higher if more time had been allowed to find the best buyer for these products. When selling low-to-medium appeal products with a fixed price format, it may take a month to find the right buyer, but if the goal is to sell at an optimum price, time is your ally.
Few companies have selected the counter-intuitive solution to sell at a fixed price. It can be more complicated for them at first, as the price asked for the merchandise must be precisely calculated each time, considering multiple factors, instead of letting the market decide the price by itself.
This method has its appeal, however. The biggest advantage of the fixed price business model, both for retailers and liquidation buyers, is that it creates a predictable business relation by removing the uncertainty due to supply availability and pricing. This regularity is essential for a healthy, long-term relationship between commercial partners. A recurring business with regular liquidation buyers facilitates the whole process and reduces the costs and labor that are inherent in the constant search for new buyers. Interestingly, such costs are almost never factored into the equation, since they are perceived as “normal”, when in fact, they are almost completely avoidable.
Since prices are fixed in advance, retailers can invoice the liquidator the exact amount for the deal as soon as the inventory is shipped instead of shipping on consignment while waiting to know the final price for every transaction. The shortened sale process allowed by the fixed price format gives retailers the chance to free up warehousing space much faster. As soon as a full truckload of merchandise is accumulated, a shipment can be prepared, and an invoice issued. The entire process is efficient, with no surprises.
The myths around the auctioning process in the reverse logistics industry are difficult to dissipate, especially with all the publicity that they acquire online. What is important to understand, however, is that excitement should not be misinterpreted for good business. The retailers and their buyers can find better ways to strike deals that are more profitable by cutting down purchasing costs and warehousing costs, and that offer steady, predictable supply for their respective companies. In a world where every deal must be fought for tooth and nail, the fixed price model can offer the calm and structure needed to focus on what matters most for someone’s company: profitability.