October 1, 2010, 11:45 AM

The Right Message

A sound online liquidation strategy means weighing brand along with financial return.

The problem started about two years ago, when ShoppersChoice.com LLC began cranking up production of product demonstration videos. The online retailer couldn’t stuff most of the items used for videos back into boxes and sell them as new. When it came to barbecue grills, for instance, cooking on them not only meant they couldn’t be sold as new, but often left scratches or dents.

So the retailer, which began in 2000 as TheGrillStoreandMore.com and now operates 29 retail sites, had to figure out the best method to get rid of the used inventory. “We have a warehouse of stuff we have made videos for,” says Corey Tisdale, the retailer’s chief operating officer. “Dead inventory means we are paying rent for nothing.”

ShoppersChoice has to sell the inventory in a way that would return as much profit as possible—five to 10 percentage points above cost would be nice, Tisdale says—without diluting brand and product reputation. Offering wildly reduced prices on an online marketplace, for instance, ran the risk of persuading shoppers that the products were overpriced duds, or that consumers should wait for better deals than offered through the retailer’s e-commerce sites.

“We don’t like the message we convey if we list a product for too much off the retail price,” Tisdale says. For now, the retailer sells its excess and used stock on its own site, with consumers able to see the price cuts and the reasons for them.

When it comes to selling excess or used inventory online, retailers must weigh getting the maximum financial return against the potential for harming how they are viewed by consumers. And they have to consider relations with suppliers, who may have rules against disposing of excess goods on outlet sites. Even if a supplier doesn’t prohibit sales of its goods on sites like eBay, it may still be concerned about damage to its brand if a retailer exiles too many products to digital bargain bins.

At the same time, retailers, online liquidators and observers say consumers are becoming better at shopping for bargains, including through closeout and liquidation sites, which tend to buy items in bulk after retailers determine what products cannot be sent back to vendors. And all this is happening against the backdrop of a dim economy, with retailers trying to maintain the tightest slack possible between consumer demand and inventory, either by carrying less inventory or getting rid of excess items as quickly as they can.

“Two years into a challenging economy, most retailers and manufacturers are a lot smarter about inventory quantities,” says Bob Auray, who oversees reverse logistics and product liquidation business units for Genco Marketplace, an online business-to-business liquidator that is a subsidiary of Genco Supply Chain Solutions.

Strong demand

Estimates from observers and liquidators say overall sales in what is commonly called the secondary market reach up to $500 billion annually. And customers of the closeout and liquidation sites show loyalty. Marc Joseph, the president of DollarDays International Inc., which operates the closeout site DollarDays.com, says 40% of his business comes from customers such as bricks-and-mortar stores, non-profit groups and home businesses that have made at least four purchases on the site.

The closeout and liquidation market could get a boost from the leftovers from the holiday shopping season. The National Retail Federation and Hacket Associates, a maritime consulting firm, have projected that retail container traffic to the United States would increase 16% year over year in September, following a 17% increase in August and 25% in July.

“Retailers have stocked up early on much of their holiday merchandise in order to avoid some of the supply chain disruptions seen earlier in the year,” says Jonathon Gold, the trade association’s vice president for supply chain and customs policy. “Cargo is still coming in, but the key question for sales will be what happens with employment and other factors that affect consumer confidence this fall. Retailers are hoping they’ve hit the right balance of supply and demand.”

Joseph, however, is skeptical that the retailers’ optimism will be rewarded. “The products just sitting out there in the warehouse, that is the next wave of closeout,” he says.

Ways to sell

Back at ShoppersChoice, Tisdale was more focused in early September on getting rid of grills and other warm-weather products as the summer ended than on holiday goods. Company officials, in fact, recently have started to talk to online liquidation companies about what kinds of deals could be struck to help the retailer sell its surplus inventory.

“You can use your own network of wholesale liquidators, you can sell through your own secondary channels, you might have a wholesale outlet, you might have your own online liquidation portal tied to your brand,” says Michael Blumberg, president and CEO of Blumberg Advisory Group, a consulting firm that focuses on liquidation, in describing some of the common options for retailers. Generally, retailers can expect to recoup 20% to 40% of wholesale costs on liquidation and closeout merchandise, says Blumberg.

One approach to handling excess inventory is to go with a company such as Genco. Its software can analyze the bar codes of excess goods and separate the products that can be returned to vendors from the merchandise that must be liquidated, Auray says. The company will sort products according to category—such as apparel or consumer electronics—to further evaluate which items will bring the best financial returns.

The company can decide that products stand a better chance on an online marketplace or through an online outlet store for the retailer, with the customer service outsourced to Genco. And products can be bundled together in mixed pallets for export or sale to small wholesalers.

Retailers also can sell excess inventory on an online marketplace such as eBay. But eBay presents some challenges for a retailer, Tisdale says.

Weird message

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