July 31, 2011, 12:00 PM

Clear it Out

While planning for strong holiday sales, e-retailers need an exit strategy for leftovers.

It's midsummer, and that means it's time for e-retailers to finalize inventory decisions for the winter holiday sales season. E-retailer buyers and merchandising teams have spent months poring over sales data and product run rates, manufacturer forecasts and trend data so they can place orders for enough units that they don't forfeit sales because of sellouts, and also not over-order and be left with pallets of unsold merchandise come Dec. 26.

"I really am trying to hit it on the nose and order what I think we can sell through the end of the year," says Mark Carson, owner of FatBrainToys.com, a specialty toy e-retailer. Carson says November and December account for about 60% of his company's annual sales.

Accurate forecasting is especially important for web-only retailers and consumer goods manufacturers that sell online, because, unlike retail chains, they don't have physical stores that can absorb unsold merchandise. But forecasting is not an exact science, and the wobbly U.S. economy isn't helping this year.

High fuel costs, rising food prices and sustained high employment are likely to put a damper on overall retail sales this season, but online retailing should continue to grow, says Kantar Retail senior economist Frank Badillo. One reason: higher-income households tend to spend more online and they aren't hit as hard by high gas and food prices as less affluent consumers.

"Most online retailers will see double-digit gains, but maybe not as strong as a year ago," Badillo says. Kantar Retail says non-store retail sales—mostly generated online but also through catalog call centers—rose 15.3% during the 2010 holiday season compared with 2009.

"We continue to get a lot of mixed signals," says Larry Sales, vice president and general manager of merchandising for kitchen goods e-retailer Cooking.com Inc. "The best we can do is look at how we are doing this year so far, look at what numbers we can draw from last year and at what we are buying into, and then review the numbers together and take an educated guess on how much to order." The fourth quarter represents at least half of Cooking.com's annual sales, he adds.

E-retailers say they aim for a certain level of sell-through at full price, and pre-plan for markdowns and promotions so they come as close to selling out as possible during the season. But they also have to be ready to move out any remaining stock in January—be it to outlets, back to the supplier, to flash-sale sites or a liquidator—and then use the data from sales duds to inform next year's purchases.

The best-laid plans

The holiday season represents about 65% of annual sales for the Discovery Channel Store Inc., operators of DiscoveryStore.com, the e-retail arm of the Discovery cable TV channel. The e-retail store primarily sells DVDs of popular Discovery Channel programs, gadgets and electronics aimed at adults, and toys. The e-retailer started selecting the toys, gadgets and electronics it'll carry this holiday season in October 2010, says Christine Wacker, director of commerce partnerships.

About 90% of the gadgets and electronics are new each year, as are about 50%-60% of the toys, which means there isn't much prior sales data to go on for those categories. The e-retailer makes its final assortment decisions by April, and places orders with international suppliers by June 1. Purchase orders to domestic suppliers go out in August.

The long lead time means there is room for error, Wacker says. DiscoveryStore.com aims to sell 70% of its inventory at full price, and end the season with 90% sell-through once markdowns are taken. "At 90% sell-through, it means we will be in a fantastic position for next year," she says.

However, that 90% target can be hard to hit. In 2008, the economic meltdown left the e-retailer with lots of leftover merchandise, since purchase orders had been made when the economy seemed strong. It was also the year Discovery closed its 103 retail shops, which Wacker says had previously provided an outlet for selling overstock goods. 2008 Q4 revenue for parent company Discovery Communications inched up a bare 0.11%.

With little other choice, the e-retailer turned to a liquidator for the first time to clear the excess merchandise. Since then, it has had a pre-negotiated and open contract with a liquidator, just in case. "It is a hit on the books, but it is a cost-effective way to get out of holding inventory," Wacker says, adding that she uses a liquidator only as a last resort. Last year, DiscoveryStore.com sent about 3% of its remaining inventory to a liquidator after its post-holiday clearance sales ended.

The price liquidators pay e-retailers for overstock merchandise varies depending on demand and product category, but retailers can expect liquidators to pay about 25% to 30% of the retail price for merchandise, says Michael Blumberg, a reverse logistics management consultant with Blumberg Advisory Group.

Rather than turning to liquidators, some e-retailers prefer to include clauses in their purchase orders that allow them to return a certain amount of unsold merchandise to the supplier for credit on a future order or exchange for better-selling products. "We negotiate it up front. We might pay a higher cost per unit for the ability to return it if it doesn't sell," Wacker says. She says this option is most readily available from the suppliers DiscoveryStore.com regularly buys from. "If they feel they would not have business with us going forward," she says, "they would never put the clause in."

Discovery moves product to a liquidator or back to its supplier in late January, when the number of visitors to DiscoveryStore.com drops off and any future sales of unsold goods probably would not offset the cost of storing the merchandise. "It's hard to get enough eyeballs on the site after this point if you miscalculated," Wacker says. The e-retailer has also tried selling excess stock on discount marketplaces like eBay.com and Buy.com. But Wacker says it wasn't worth the trouble because they were hard to manage and never generated enough sales to make a real dent in inventory levels.

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